Last week, like many times over my past 21 years working as a Wealth Advisor, I received so large a compliment that it was humbling. However, upon more reflection, I don’t think it was intended as a compliment.
After learning of my occupation, my golf partner hit his shot, and then turned to me and said, “So Steve, what do you think about the stock market?” Until recently, I didn’t quite realize how much of a compliment this was. It reconfirmed my belief that most people are good-hearted and looking for the best in others, but my answer might have surprised him.
In mid-August, stocks broke the record for the longest bull market in history, rising for some 2,383 trading days without a single 20% bear-market break. During that time, the S&P 500 Index rose over 320% - a 16.5% annualized rate over this period of time.
But the real question behind these mind-boggling numbers is whether or not this strong market will continue to break records. For fundamentals-based investors, a key indicator of what may be to come is valuation: whether stocks are really worth what the market is currently paying for them.
So back to my golf partner’s question about the market…it dawned on me that, out of all of the commentators on CNBC, the “smart people” who write for the Wall Street Journal, the Harvard MBA fund managers and even his financial advisor, he thought to ask me about the stock market. I considered his question thoughtfully, and then I answered with a smirk and a grin:
“I’m truly flattered that, out of all the really smart people on Wall Street and in the financial media, you thought to ask me about the stock market. I’m honored that you feel I would know more than they do.”
Now, I’m not discounting the experience and knowledge we have gained over the years, or the wisdom of those who have mentored us along the way. We work hard to stay informed. I also don’t think our answers to that question are any less valid or potentially less correct than anyone else’s answers. We take managing clients’ money very seriously and do so as a legal fiduciary, a Registered Investment Advisor.
In our blog, “Financial Acrophobiacs Unite,” we discussed the Three Great Truths that we contend are incontrovertible. They are worth repeating.
- We cannot say when or at what level a market correction will begin.
- We cannot say when or at what level a market correction will end.
- We know that however deep or shallow the correction, it will be temporary.
Let’s face it, no one gets the “Where do you think the market is headed?” question right consistently. While that would be incredibly valuable to know, we feel the answer to that question is unknowable (on a short term basis). However, on a long-term basis, we can look at valuations of stocks (and bonds, commodities, real estate and everything else) and determine where long term value (and risk) lies.
In terms of earnings expectations, stock valuations don’t appear to be overly expensive, trading at a P/E ratio (the price of a stock divided by its earnings) of 17.7 (see chart above). That’s somewhat higher than the average forward P/E of about 16.9, but it’s a far cry from the high of 26.9 reached during the heights of the “Tech Bubble” of 1998-2000.
More notably, earnings expectations have risen in light of strong company earnings, driving the P/E down to 17.7 – making the S&P 500 more potentially attractive as the year has progressed.
The bottom line is, at this point, stock valuations don’t appear to be excessive by historical measures. But where they go from here is really anybody’s guess.
So to my golf partner, “Thanks again for the compliment,” but if you are more than mildly curious about where the markets might be headed, then your bigger question really might be “Am I going to be OK?” That’s a different conversation, one best held in our offices.
(Statistics per Legg Mason)