Market Update

It appears that the market keeps hitting new highs almost daily.  From its low at 666 in March 2009, S&P 500 climbed some 260% during the last 8 years.  We seem to be in a secular bull market.

But it hasn’t been smooth sailing.  While these events are distant memories now, at the time they caused significant market angst and often sharp pullbacks.  Events such as U.S. debt ceiling causing near shutdown of the government, debt issues of some European counties (remember PIGS?), and of course, more recently Brexit and Trump election.  Nevertheless, the market overcame these issues and has been rising following what it always does in the long run — improving economic fundamentals.

There is a lot of discussion in financial press about high valuations.  Indeed, forward PE is at 17.5, considerably higher than average of 15.  The economic expansion is 8 years old, considerably longer than average, causing some pundits predicting a recession.  And that 260% gain seems impressive, causing other pundits predicting a market correction or even a bear market.

I think that both pundits are correct — there will be a recession and there will be a market correction.  The $64,000 question is when.  And that, no one knows, and, in my opinion, is definitely not worth agonizing for.  A quote by Peter Lynch is very appropriate here: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

The very fact that there is so much skepticism in the press, and still a lot of caution among individual investors tells me that the bull market has more room to run.  And valuations and appreciation rate are all in the eyes of the beholder.  Indeed, from the peak of 2000, S&P rose only 56% in 17 years, or about 2.7% per year which is far inferior to average 10% annual gain.  For comparison, from the prior major peak in 1972 (when S&P index reached a great high of 118), to the 2000 peak, the index increased 12-fold.  This quarter, earnings increased by nearly 14%, much better than expectations of 9% just a month ago.  And with positive earnings surprises, estimates call for 10% increase in 2017, which is likely to be revised higher.

As happened before, I am sure that the market will continue to be prone to panic attacks.  But it is prudent to keep the course.  In investing, very often, the best course of action is to do nothing.