Commentary provided by Paula Wieck, CLS Investment Research Manager
While markets have pulled back a little in the last week, we’re still near record highs for the S&P 500 and Dow. The S&P 500 has returned over 125% since the low on March 9, 2009. On the 14th of this month the S&P 500 was at 1563.23 – just two points away from the all-time high of 1565.15 on October 9, 2007.
Investors and professional money managers may begin to cringe as the market reaches new highs. Should we be anticipating a pullback? Interestingly, if you compare market fundamentals to where they were prior to the last two recessions, the market is still attractively valued.
Today the price-to-earnings ratio is lower, and earnings and dividend yields are higher than the previous two market highs. These are all signs of a market which is still fundamentally undervalued, and still poses good buying opportunities.
While valuations are still attractive, GDP growth will likely remain slow for the foreseeable future. Companies, however, are in excellent shape. Corporations are holding on to record amounts of cash, and at some point they will have to make this cash work for them. More than likely these companies will try to benefit shareholders by increasing dividends and/or share repurchases, increasing the total return of the equity market.
We keep talking about the housing recovery. Why? For most of the population, an individual’s house is the most valuable possession they own. As house prices continue to recover, people are going to feel better about their financial situation, increasing their confidence. A consumer who feels good about their financial situation will spend more. Remember those corporate balance sheets with record amounts of cash? An increase in sales due to an increase in consumer demand sweetens the situation even more.
Now that I’ve pleaded my case for investors to remain optimistic about the stock market, I’m going to tap on the breaks a bit. It’s not uncommon for a pullback to occur after we’ve seen such a strong rally. The market can get spooked by just about anything from another debt ceiling debacle, a little country in Europe needing a bailout, an uprising in the Middle East, or any other unforeseen event. Because of the strong equity fundamentals, healthy corporate balance sheets, and improving consumer balance sheets, a pullback could likely be short lived. After all, there are large amounts of cash on the sidelines at the corporate level and the individual level. Many are just waiting for an attractive entry point.
How are we managing portfolios in this environment? We are investing in the companies with more stable earnings and stronger balance sheets through a variety of ETFs which are comprised of these larger, higher quality global corporations. We believe these companies are devoted to increasing shareholder’s capital, and they will the most resilient in a slow growth environment. From a sector perspective, valuations remain crucial. Currently we are adding exposure to sectors in which we find are still undervalued relative to the market and from a historical perspective. Sectors in which we are looking to hold overweight positions or add exposure to are Energy, Technology, and Financials.
Is the market finally breaking out into a secular bull trend? I don’t know that anyone can answer that question. The best thing investors can do right now is not attempt to time the market and invest in stable companies which are attractively valued, as these equities tend to stand the test of time.