posted on March 6th 2015 in Market Commentary with 0 Comments /

In the midst of 2008-09’s downward economic spiral, gloom, and talk the economy could enter a Great Depression, the S&P 500 Index ended March 9, 2009 at 676.53, according to data provided by the St. Louis Federal Reserve.

Few predicted at the time that stocks had put in a bottom, and investors had just given birth to a new bull market that would take the major indices to a series of new highs. Nearly six years later, the S&P 500 ended February 2015 at 2,104.50.



3-year* %

Dow Jones Industrial Average




NASDAQ Composite




S&P 500 Index




Russell 2000 Index




MSCI World ex-USA**




MSCI Emerging Markets**




Source: Wall Street Journal,*Annualized **USD

Thus far, the bulls have simply blasted through a series of hurdles. Obstacles that have crossed the bullish path include the gridlock on Capitol Hill, the fiscal cliff, 2013’s government shutdown and threat to breach the debt ceiling, an anemic U.S. recovery, the Arab Spring, the Russian incursion (or invasion if you prefer) into Ukraine, the rise of the Islamic State, and global economic weakness. None have decisively derailed the bullish run.

There was the summer of 2011, when the bulls were temporarily tripped up by the growing euro zone debt crisis, a threat of a double-dip recession, and the U.S.A.’s loss of its triple-A credit rating from Standard & Poor’s. But it wasn’t long before patient investors were rewarded with new highs.

There were the naysayers who credited the market’s gain to the Fed’s generosity via quantitative easing (QE), or the trillions of dollars in longer-term bond and mortgage-backed security purchases. The end of QE was to coincide with the end of the bull market. That didn’t happen.

More recently, the scare created by the Ebola virus, the surging dollar that has slowed revenue growth among the multinational corporations, or the collapse in oil prices have prevented the S&P 500 Index and the Dow Jones Industrials from crossing into record territory last month.

Nor did it stop the NASDAQ Composite from cracking 5,000 for the first time since the 2000 Internet craze.


But are stocks now overvalued? That question tends to come up with an increasing amount of frequency these days.

John Bogle, who is the founder of the Vanguard Group, was asked that very question in a late February interview on CNBC. Here’s what he had to say:

“The stock market is fairly, fully valued. I don’t see it as particularly cheap. But if it’s a little overvalued, that’s what we have to deal with as investors.  Sometime it’s overvalued and sometimes undervalued. There’s certainly nothing approaching a bubble.”

At least in Mr. Bogle’s view… He went on:

“When you look out far enough down the road you see an awful lot of risk out there – risk to the European financial system…and risk to the euro itself. There is terrorism going on in the Middle East and it may be spreading. The world is a risky place and stocks are not cheap.”

When asked if he thought stocks were expensive, he replied,

“I wouldn’t say ‘very highly expensive.’ If you put me on the spot and said is it likely to be somewhat overvalued, I would probably say yes. But I don’t think investors should do anything about that. I think speculators should do something about that, but I think in the long run speculators lose and investors win.”

Let’s talk about how “expensive” stocks may or may not be using one of the more common gauges of market valuation.

As February came to a close, the price-earnings (P/E) ratio on the S&P 500 Index stood at 19.0, according to the Wall Street Journal.

Using the data provided by Yale Professor Robert Shiller, whose Shiller Cyclically Adjusted P/E ratio and Case Shiller Home Price Index have garnered plenty of attention, the average P/E ratio going all the way back to 1960 is of 18.9, slightly below today’s valuation.

And it’s well below the 2000 bubble peak of 28.5.

Let’s add interest rates to the mix, which are at rock bottom levels today. T-bill rates are practically at zero and the 10-year government bond yield is hovering near 2%. Both add to the attractiveness of stocks.

Without getting into the minutia of discounted cash-flow models, but simply put, low rates in today’s fixed income market provide little competition for stocks.

Bracing for volatility

While the expanding economy, rising corporate profits, and a low rate backdrop have created strong tailwinds for stocks, stock prices never go straight up.

Though we haven’t had a 10% drop in the S&P 500 Index since the summer of 2011, we have experienced turbulence. Last October and December and a hesitant start in January are prime examples.

Whether stocks are fully valued or have room to run always creates lively debate, but at a minimum, stocks aren’t cheap. Yet, expectations of moderate growth coupled with gradual Fed rate hikes help support prices.

Still, valuations appear to be quite lofty to some and any uncertainty creates turbulence.

At today’s levels, any bad news can and does encourage short-term traders to head to the sidelines. Sometimes the moves can be quite violent, as we saw last October.

At much lower prices, those same headlines might not have rattled traders to the extent they do now. Yet, each time it has happened, whether recently or over the course of the last six years, the fundamentals have reasserted themselves, limiting the downside and driving stocks to new highs.

What does all of this mean?

While new highs in the market are reassuring, the question that is sometime asked is whether it’s a good time to “cash in our chips.”

First of all, we hesitate to even use the term chips since that conveys you’re sitting in a casino with a drink in hand. We’ve carefully crafted a well-diversified investment portfolio designed to achieve your long-term goals, not a roll of the dice.

While we may sometimes recommend adjusting your portfolio based on expected changes in your personal situation, a new high, by itself, is not a good reason to sell.

During 2014 alone, the S&P 500 Index recorded 53 new daily highs (Wall Street Journal, St. Louis Federal Reserve). And that’s on top a whole host of record closes in 2013’s steep rally.

Following the uncertainty in January, the broad-based index of 500 large companies racked up four closing all-time highs in February, with the last recorded on February 24 (St. Louis Federal Reserve). Again, a new high is not a good reason to sell.

At some point, the current bull market will come to an end and the economy will enter a new recession. It’s the economic cycle of life. While the portfolios we recommend are not immune to downside risk, they are individually crafted to meet your longer-term financial goals, including the bumps we sometimes face.

about the author: WorthPointe Wealth Management

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