Dow 20,000 is the talk of the town. There is no escaping it. As I write this (Wednesday at 10:36 am), the index is a mere 0.60% away.
But a question being asked, explicitly and implicitly, is this:
“Do the current valuation levels (specifically P/E Ratios) signal a market top?”
My opinion? Not by themselves.
Research from LPL Financial and Barclays indicates a weak relationship between one measure of stock valuations (Price-to-Earnings ratios) and one-year stock market performance (S&P 500 Index).
- One-year returns are typically higher when P/E ratios are low.
- However, by a nearly three-to-one margin, one-year returns have been higher when P/E ratios exceeded today’s level.
- In all cases, one-year returns vary considerably.
- Well, historically, stocks have a long-term upward bias. See the chart below.
- I think P/E ratios are most likely poor predictors of one-year performance.
- You may remember Former Fed Chief Alan Greenspan expressing concern about lofty stock prices in back December of 1996…that ended up being three years before shares peaked.
Concerns are warranted if you believe a recession is looming in the next 12 months, because this will cause the estimates of earnings to come down. Prices would likely follow.
However, I don’t believe that there is a recession on the short-term horizon. I’ll write more on that next Monday.
Be sure to take a long-term approach, maintain liquidity if you foresee any need for cash over the next 18 months or so and a have a well-crafted portfolio to reduce risk. If you need a chunk of cash over the next 18 months and you don’t currently have it built up, selling now is not a bad idea. If you are a client and that applies to you, please call us so we can make a plan.
Please remember three things:
- Trees don’t grow to the sky and the market will pull back at some point. Don’t anchor on the highest value your portfolio achieves during a rally.
- Recognize that a bear market is inevitable…it’s just that no one knows when.
- After any pull back or bear market, there will be an eventual upswing. How you handle a pull back or 20% correction (bear market) will be the key to your ultimate long-term success.
Timing highs and lows are nearly impossible.
Call with questions.
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Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. All indexes referenced are unmanaged and cannot be invested into directly. The economic forecasts set forth may not develop as predicted. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Monument Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Monument Wealth Management’s current written disclosure statement discussing our advisory services and fees is available for review upon request.