March 13, 2017 • Markets
Mid March 2017 Stock Market
Through March 10, the S&P 500 Index (benchmark for large cap U.S. stocks) has returned 6.4%. Since the election last November, the market has gained a very strong 15%. And since the market lows in March 2009, the S&P 500 has advanced roughly 250%. We’re currently in the midst of the second longest U.S. bull market ever.
As the market has risen in 2017, we’ve gotten questions from some clients on whether they should increase their stock exposure. Our feeling is that if one has a truly long-term time horizon and no need to use the money, then putting new money to work now is okay, especially with interest rates still at historically low levels. However, for anyone with a short to intermediate timeframe or a low tolerance for market volatility, we believe now is a time to be cautious with new investments.
Our caution stems mostly from valuation. Based on estimates for the next 12 months the market is trading at 18x earnings compared with a long-term average of 15x. A March 2, 2017, article by Jill Mislinksi in Advisor Perspectives, notes that based on trailing twelve months earnings the market is at nearly a 24 multiple compared with just under 17x historically. And based on Robert Schiller's 10-year average P/E multiple methodology, the market is at its third highest valuation ever, behind only the 2000 tech bubble and the late 1920s bull market.
Of course, the market can stay expensive and not decline for a long time. Further, Republican proposals to reduce taxes and regulations and the potential for enhanced infrastructure spending all could accelerate earnings growth, giving the market a chance to grow into a more reasonable valuation. Because of these factors and the impossibility of consistently timing the market, we’re not advocating selling beyond staying in line with targeted stock allocation goals. At the same time, we’re advising clients not to get carried away with and/or extrapolate recent market gains.