Investors in the U.S. stock market seemed to have a classic case of what we define as “bubble-phobia,” loosely defined as “fear that this bull market will collapse in a similar fashion to ones in the not so distant past.” These symptoms can afflict the experienced professional as well as individual investors and include a failure to commit an appropriate percentage of assets to stocks based upon a fear that the current bull environment is unsustainable. This “bubble-phobia” can further manifest itself in a lack of action by the investor thereby keeping said investor out of the stock market and reducing one to being reactive rather than proactive.
In this new year, our prescription for the above referenced malady is simple—set up disciplines and follow those disciplines. One way or another, decisions are made. Either you make them or, through procrastination, they are made for you.
To help ease your case of “bubble-phobia,” we point to several reasons why the stock market is not in a bubble. First and foremost, investors can feel comfortable that relative stock valuations are reasonable. With the S&P 500 trading at just under 2,100 along with projected 2015 earnings of approximately $130, the Price-to-Earnings (P/E) Ratio, a common tool used for valuation, stands at 16.0, somewhat in line with the normal historical range.
Corporate profits benefit from a stable interest rate environment, one which makes for a healthy business climate. With interest rates at multi-decade lows and with a Federal Reserve reluctant to upset the apple cart by substantially raising rates, this accommodative environment should continue into the foreseeable future.
At this time, rampant inflation appears not to be an issue. Due to the slack in the economy, both the Consumer and Producer Prices indices, key measures of inflation, are subdued and now, with oil recently trading somewhere around $38 per barrel, the pressure on manufacturers and service providers to raise prices appears to have ebbed.
The leading stocks over the past few months have been quality companies with sound earnings and foreseeable growth in corporate profits. They have not been speculative companies. Historically, a market led by the “blue chip” companies usually has not reached its peak. It is when it is led by the speculative companies, those that retail investors like, that the market has historically topped out.
Despite the above, we have begun to moderately shift assets overseas. We believe that the substantial underperformance of international stocks as compared to those domiciled in the United States is over and a regression to the mean is likely.
Finally, retail investors have not fully embraced this rally. As long as “bubble-phobia” continues to persist, there is most likely room left to run. At this point in time, stocks are still climbing that venerable wall of worry. If history is any guide, after a brief, relatively shallow pullback, we look forward to a choppy but upwardly moving stock market over the first quarter of 2016.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, call 279.1044.