Once again the markets have made new highs and the media seems to forget that new highs is what the market is supposed to do. Citing the “remarkable” rally since February of nearly 20% (the yellow arrow on the bottom right to 8/16/2016 on the Chart below), the market could be showing signs of topping out. However, that is not the way to view the market.
The “rally” since February is not a bull market rally– it has only been a recovery from a selloff or bear market that started in May of last year as seen in the first arrow below.
S&P 500 Index is a capitalization weighted index of 500 stocks representing all
major domestic industry groups. It is not possible to directly invest in any index.
Between the arrows the S&P 500 dropped about 15%. It then took until 7/13/2016 just to regain its prior high. Looking at the market this way we have had a very unremarkable market since May of last year – a paltry 2.3% return in 15 months. Bull markets start when the average breaks above the most recent high, and stays above that level. This paints a very different perspective of the markets new record highs.
Normally, I’d say this has been a very healthy consolidation period (a sideways market) and we should be ready to launch into a true bull market. The problem is that S&P 500 earnings have been declining, not growing over this period. When looking at market value as a function of corporate earnings, the market has indeed become more expensive even as it has really gone nowhere on a net basis.
Whether the market is overvalued or undervalued is not just a function of “record highs”. Market value is a function of corporate earnings. While the overall outlook for economic growth is not particularly promising, there are a few individual companies are managing to buck the trend. According to www.zacks.com 2nd quarter earnings and revenues were negative – but less so then 1st quarter 2016. Slightly promising, but not exciting.
While we are maintaining a fairly high cash position in our growth portfolios we continue to look for undervalued opportunities. Our dividend based strategies remain mostly invested, as we still believe any market rally will be short lived, and collecting dividends in a sideways market is a solid strategy.
Mr. DeShurko is a registered representative of Ceros Financial Services, Inc. (Member FINRA/SIPC). Ceros is not affiliated with 401 Advisor. The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.
Past performance does not guarantee future results. There is no guarantee that any investment or strategy will generate a profit or prevent a loss.