Stocks are near record highs
- More than six years into a bull market, the S&P 500 has soared more than 200%, driving the price-to-earnings (P/E) ratio up above its long-term historical average.
- But while stocks are no longer cheap, they are not yet very expensive.
- For investors who may have seen their equity allocation swell beyond their strategic allocation, a conversation about rebalancing with their financial advisors may be in order.
Bear markets don’t just happen…external factors cause them
- Given the market’s ascent to new highs, many investors wonder if, in fact, these levels also represent a new peak.
- History shows that certain conditions—including recessions, aggressive rate hikes and oil spikes—have all been associated with bear markets. Today, it is hard to see any of these issues present.
- Importantly, valuation has been a poor predictor of bear markets. Investors should remain well balanced in case of a pullback, but a large bear market seems to lack an immediate cause.
Corporations are still shareholder friendly
- An improving economy and slowly growing profits should remain supportive of the equity market, particularly if energy prices and the U.S. dollar stabilize this year.
- Corporate balance sheets, with large cash piles and reduced debt loads, also remain healthy.
- This has manifested in a wave of share buybacks, mergers and acquisition activity and increased dividend payouts—all of which are supportive of share values.