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Resources / Commentary | June 21, 2017
Stocks continue to teeter at all-time highs and the out-sized profits enjoyed since November of last year are really a continuation of the bull market that turned 8 years old this past March. Low starting valuations, improved economic growth and employment, increased corporate earnings and low interest rates have driven the moves upward.
Stocks continue to teeter at all-time highs and the outsized profits enjoyed since November of last year are really a continuation of the bull market that turned 8 years old this past March. Low starting valuations, improved economic growth and employment, increased corporate earnings and low interest rates have driven the moves upward.
A couple of things about bull markets: they don’t generally die of old age and there will be no grand announcement when Elvis has left the building. We still don’t love valuations – every metric shows that stocks are at expensive levels. Valuation is a terrible timing tool, though – it’s far better at quantifying how far things can fall (or rise). Also, we are at the start of a v-shaped recovery in earnings which will help support stock levels. Based on forward price-to-earnings, the S&P 500 is just a few percentage points greater than its long-term historical average, but this doesn’t allow much room for error.
We are also concerned about investor complacency: volatility is roughly half its historical average; it suggests that investors don’t have a healthy enough fear of what could go wrong. Historically that doesn’t have to revert quickly to the mean either, though.
What would derail this market is a recession. Our canaries in the coal mine indicators are:
We have our eyes on other canaries too – some healthy, some not.
Our conclusion, then, is that a recession would definitely put a dent in the bull market, but we aren’t selling anything in anticipation of that. Yet. A way to participate in gains and also prevent big, unrecoverable losses may be to develop a sell strategy. We set stop-loss limits underneath our holdings in order to establish a level to get out of the way of a downward trend in prices. This allows us to invest in strength and avoid weakness, a key in attempting to making money by not losing it.
Price-Earnings Ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.
The S&P 500 Index, a registered trademark of McGraw-Hill Co., Inc., is a market-capitalization-weighted index of 500 widely-held common stocks. Investors cannot directly invest in an index and unmanaged index returns to not reflect any fees, expenses or sales charges.
Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index.
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