The stock market continues on an impressive winning streak with the Dow Jones Industrial Average continuing to set new record highs. The index, through this Thursday’s close, has seen ten consecutive gaining sessions – a streak not seen since 1996. The S&P 500 closed on Thursday just two points shy of its record closing high of 1565 set in October 2007 and is up an impressive 9.0% year to date (which excludes dividend income).
The basic investing mantra of “buy low, sell high” can cause one to have concern of buying new stock positions at record high levels. But a deeper look would suggest that though prices are at or above record highs there is still good value in equity investing. When you buy stocks, you are really buying the company’s earnings. Even though stock prices are up, so are company earnings. To properly evaluate stocks, one important measure to consider is the price-to-earnings ratio (P/E). Company earnings in aggregate are well past their previous record high which leaves the current market P/E under 14. At the October 2007 highs the P/E on the market was around 15.7 – which suggests you are now paying less for each dollar of company earnings when you buy stock than you were in 2007.
Dividend yields on stocks are also attractive relative to fixed income in this low rate environment. The current yield across the S&P 500 is at about 2.14%, which is higher than the current yield on the 10 year Treasury of 2.04%. This is a tough comparison since there is much more investment risk inherent in stocks, but as a result of recent price appreciation in stocks and the relative yield comparisons many individual investors are continuing to pour money into stocks in hopes for continued gains. This is seen by the recent positive net inflows into stock mutual funds – a reversal of the trend over the last few years of investors moving money from stock funds into fixed income funds. Though the individual investor is probably kicking themselves for not buying into stocks earlier in the rally, their return to stocks is a positive for equity holders as their additional purchases could provide for further price gains.
So while it may be tempting to sell some of your investments following the recent strong gains in stock markets we still feel that is not advisable. As part of our ongoing portfolio management process we may sell positions that have had strong recent gains to rebalance the portfolio, but selling stock at record highs simply in an attempt to prevent a future loss is market timing which we want to help clients avoid.
According to the Wall Street Journal the average market return received once the DJIA hits a new record high, prior to the next bear market, has been 28%. Though we can’t predict the future we can comfortably say that over time stocks could rise further, then decline, then rise to set a new record high just as has happened many times over the course of market history. And that is as vague of an answer to the “Now What” question as I can give you!
Enjoy the new market highs! Every investor who stuck it out through the 2009 lows and fully participated in the market’s recovery deserves a celebration for their proper investing discipline. Cheers!
Travis Boyer, CFA