Since the index hit a low in March 2009, it has rocketed 250 percent. What should investors do now?
If you were an investor in the early part of 2009, you remember how bad the market seemed. I can still here the echo of people saying, “I think the market could go to zero.”
Literally zero. That’s what people said to me.
It’s been six years since we hit a low on the Standard & Poor’s 500 index on March 9, 2009. That day, the index closed at 676.53. Since then, the S&P 500 has increased almost 250 percent (total return as of the end of April 2015, according to JP Morgan Asset Management). I acknowledge that it hasn’t been a smooth ride for investors, but the fact remains if you didn’t “panic sell” and instead remained invested, you have likely recovered from the greatest recession we have seen since the end of World War II … and then some.
There’s more to the recovery than the return of the S&P 500, because most investors don’t hold just the S&P 500. It’s a decent benchmark for equity investors to get a feel for how well they are doing, but it’s not likely that most investors are just “long” the S&P 500. They have exposure to other sectors as well.
For example, since the market low in March 2009, some cyclical sectors of the S&P 500 have done much better than the S&P 500. Cyclical and economically sensitive sectors like technology and consumer discretionary have had significant out-performance, not just against traditionally defensive sectors such as telecom and utilities but against the S&P 500 index itself.
As it turns out, on a total return basis over the past six years (as of end of April 2015), those two cyclical sectors have been great performers. Technology is up almost 285 percent, while consumer discretionary is up just shy of 425 percent, according to JP Morgan Asset Management.
That 425 percent is not a typo. In fact, the next-best performing sector, financials, is up about 330 percent off the March 2009 bottom. However, that is almost 100 percentage points less return than the consumer discretionary sector.
Mark those returns against the returns of telecom and utilities, which are only up 151 percent and 154 percent, respectively.
So what should an investor do now? Start by understanding two things:
- Current market valuation. There is a lot of discussion in the media these days about how expensive the market is. As of the end of May, the S&P 500 was trading at 16.8 times its forward price-to-earnings ratio, and the 15-year average is 15.9. As a data point, the forward P/E in March 2000, right before the tech bubble popped, was 25.6.
- Possible correction. As of this writing, it has been more than 1,340 days without a correction of at least 10 percent in the S&P 500. That makes this the third-longest streak in history. As a data point, there was a stretch in the 1990s that went 2,553 days.
Just because stocks are expensive or have gone a certain number of days, it does not mean they will start to go down. Valuations probably support being careful about getting into the market more than they support a thesis of getting out of the market now. When a correction comes, be ready to possibly weather a decline that could last one year to 18 months.
The real point here is the best investment strategy has to be founded on a few assumptions and a long-term view. If you take a long-term view with your investments and spend time trying to determine where you are in the longer-term economic cycle, you can likely do pretty well over any short-term economic downturn, let alone the biggest economic downturn the world has seen since World War II.
However, if you forecast needing some cash to spend over the next 18 months, consider selling some equity positions now to raise that cash. You will have the money you are going to spend tucked away, you will sleep better at night, you will remove the anxiety of a correction and you will sell when the S&P 500 is within 2 percent of an all-time high.
Otherwise, remember that the S&P 500 is up over 250 percent off the 2009 bottom, and investors with a long-term outlook are likely to participate in all of that. Raise the cash you need to spend now, and stay invested in a portfolio that is focused on the long term.
David B. Armstrong is a president and co-founder of Monument Wealth Management, a financial advisory firm that helps accomplished entrepreneurs transition to a life of long-term financial independence and wealth defined on their own terms. Based in the Washington D.C. area, Monument offers clients unbiased advice, true wealth planning, advocacy and access throughout the wealth creation life cycle.
Monument Wealth Management LLC, is a registered investment advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate, please consult your financial advisor prior to investing.