It’s certainly feel-good news, but you would be wise to keep your joy in check. The S&P 500’s year-to-date total return (price appreciation and dividends received) was 9.5% as of yesterday. This equates to an annualized gain of approximately 60%. We don’t have to rely on a cracked crystal ball to tell you this size of a gain will not happen. Since 1926, large-cap stocks have only realized full-year gains in excess of 50% two times (1933 and 1954) according to the Ibbotson SBBI 2012 Classic Yearbook (Morningstar, 2012).
Before you hunker down, be aware that stock prices do not have to endure a steep correction to correct their course. Rather, a couple of modestly down months and a few flat months could slow the pace of this year’s annualized return without causing much pain to your portfolio. It is very possible that 2013 could end up being a great year for stocks without the market indexes maintaining their current pace of gains.
Of course, none of this answers the question some of you probably have, “Should I buy or sell stocks right now?” Though the correct answer is to stick to your long-term allocation plan and to not worry about the market’s short-term movement, this kind of thinking is not often easy to follow. So, here are three observations.
Relative valuations are getting expensive. Nearly half of the 948 dividend-paying companies within the S&P Super Composite 1500 are trading with yields below their five-year averages. (Price and yield are inversely related, so low yields imply high valuations.) On a price-earnings basis, just 39% of the index members with five-year price-earnings ratios trade at a discount to their historical five-year averages.
Conversely, the length of the current bull market, which is turning five years old, favors the bulls. In a report published this past Monday, Sam Stovall at S&P Capital IQ wrote, “Since WWII, the S&P 500 turned on the after-burners in year five, with the remaining bull markets averaging a 21% increase in price -- four of which were in double digits. In addition, four of the five bull markets went on to celebrate their sixth birthday.”
Then there is the macro environment. The market remains more focused on the positive news, such as the improving jobs data and rebounding housing market, than the negative news, such as North Korea’s saber rattling. Sequestration, Europe, Japan and China are all factors that could adversely impact the U.S. economy. Favorable outcomes to some or all of these events would help stocks. The uncertainty is part of the randomness that characterizes stock prices over the long term.
If it were easy to decipher what the market will do next, everyone would successfully employ market timing techniques. The simple facts are that the market moves in ways we don’t expect and focusing on the short-term variations can prevent you from making progress on your long-term goals. So, enjoy the new highs, but realize what happens next week or next month is nowhere as nearly important to your portfolio as what happens over the next decade.
Source: AAII
The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
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