Expect Market Sell-offs But Stay Invested!Submitted by Integras Partners on October 11th, 2017
The Markets May Have Lulled Us to Sleep. No Need to Overreact When It Ends!
U.S. stock investors have enjoyed five enjoyable, but abnormal years of consistent gains with almost no significant declines. Since 2011, S&P 500 Index® has on average returned about 12 ½%, with an average drawdown during those years of just over 8%. This chart illustrates that since 1980 the index has averaged a 14% drawdown, yet 75% of these years finished with gains. So, recent experience of double-digit returns with single-digit volatility risk has got to end at some point. With markets peaking it’s probably soon.
Stock Prices are Still Within a Reasonable Range.
The good news is that the relationship between stock prices and company earnings remains healthy. Price/Earnings multiples (or P/E ratios) provide a metric to consider how much the market may be overpriced (or underpriced). This graph shows this ratio for the S&P 500 Index® as a whole. While we’ve had more than 30 new record highs in 2017, and while prices are above average, they’re still within a reasonable range. With little trust in this bull market, greed is not evident. So, we’re not really in a bubble.
Corporate Earnings Growth Likely to Support Continued Market Gains
This chart from J.P. Morgan Asset Management shows that consensus earnings for the S&P 500 Index® are expected to continue improving. As we previously explained, increased corporate profits can drive stock prices higher without them getting relatively more expensive. We started this conversation illustrating how pleasant it’s been for the past six years with fairly consistent market performance and very almost no scary downside experience. It’s reasonable to expect a bumpier ride for our markets, but the real driver of stock prices – corporate earnings – should reward us for staying invested
At Integras Partners, we employ time-horizon investing to protect short-term liquidity needs from market risk. The beauty is emotional comfort to spend today’s income while market-focused investments are insulated from sell-offs with adequate time to recover.
Call us to discuss how we can help you author a life where investments are aligned with your goals and dreams.