The S&P 500 finally closed over the psychological hurdle of 2000 on Tuesday, August 26, 2014. But in the days since achieving that milestone, it has been fluttering and sputtering. Most of the subsequent economic reports have been good, yet the S&P has failed to respond in the short term by continuing past 2000. Is it time to take some profits?
Economists disagree on whether or not a bear market is coming for a series of conflicting reasons.
- Reasonably Solid Fundamentals –While the S&P 500 has crossed a new threshold, the fundamentals do not suggest massive overvaluation. The current trailing P/E is 19.16, close to the long-term average of 18.7, with the forward P/E at 16.75. Second quarter earnings have been positive – almost 68% of those reporting topped analysts’ estimates – and earnings growth rates are expected to continue at an 8-12% pace through the first half of 2015 according to Thomson Reuters.
William Lynch, the Director of Investments at Hinsdale Associates, notes that while the market is not cheap right now, it is not particularly expensive, either – especially when compared with the alternatives such as bonds.
- September Swoon – As with some baseball teams, the September swoon is a common phenomenon, yet one that defies easy explanation. Since 1971, the September returns on the S&P 500 average a negative 0.47%, the worst month by far. If you stretch back to 1950, the value is a negative 0.64%.
There are exceptions to this rule, and the data is somewhat skewed by the horrible negative 14.58% return from 1998. Still, as a rule, September suffers; if you subscribe to this idea, you may wish to take some chips off the table.
- World Unrest –The continuing chaos in the Middle East and the fresh incursion (or invasion, take your pick) by Russia into southeastern Ukraine has some economists increasingly worried that something will flare up into a wider conflict – likely affecting oil and gas prices first and putting jitters into the collective market.
- Fed Policy – While analysts lean close to Janet Yellen, awaiting the magic words “higher interest rates”, next summer still seems the most likely target for the Fed to raise rates. The job situation is improving but there is still quite a bit of slack to take up, wages are still relatively flat and housing and consumer economic reports continue to show a slowly improving economy but nothing more.
- Correction Concerns – While the fundamentals are still relatively solid, some investors are getting increasingly nervous about the length of this bull market and its lack of a major correction. Ironically, this concern may be helping to keep things in check – nobody is suggesting the sort of “irrational exuberance” on stocks that tend to precede a bursting bubble.
Some have been forecasting an imminent correction for years now, so this is not a particularly persuasive argument – but herd mentality is a fickle thing. When there is a small driving spark (such as when interest rates rise finally do rise), the reaction may be more severe than is warranted. Even so, nothing suggests it is imminent.
The bottom line is that if you are a buy-and-hold investor, there isn’t compelling evidence that you should dump stocks. Keeping your portfolio in balance for the longer term appears to be the more prudent course. That said, the mixed bag of current signals — and a 2000 S&P — suggest that measured profit taking may well be warranted.