2nd Quarter Market Review

During the 2nd quarter of the year the S&P 500 index climbed about 4% . Bonds provided meager but positive returns as the Barclay’s Aggregate Bond Index added about 1%. Balanced portfolios were positive by 2% or so for conservative investors and approximately 3.50% for more aggressive ones (see the return data below for our favorite balanced portfolios, Morningstar Target Risk Indexes).

source: Morningstar

Based on all reasonable measures, the US stock market is very expensive relative to where it’s been historically. Investing at today’s levels means you are paying extremely high prices relative to companies earnings, cash flow, book value, etc. and implies very low future returns. We believe most reasonable estimates for US stocks over the next several years will range from 0% to 4% annually, on average, which will likely include another severe downturn when we experience our next recession.

By some measures, the stock market is even more overvalued than during the late 90’s tech bubble. Below we have the US stock market relative to GDP, a measure of the goods and services produced in the economy. It’s very close to levels seen at the peak of the tech bubble. (Chart courtesy of BofAML Global Investment)

Every reasonable measure of valuing US stocks points to one conclusion. At best, a substantially over valued asset class. At worst, yet another bubble. (Our third in 20 years).

Of course, the implications of an expensive stock market means very little in the short run. The market can continue to climb higher for any number of reasons. Essentially, an expensive market can continue to become more expensive (and one can argue that it is more likely than not to do so).

Still, we strongly believe it is prudent to reduce some exposure to more aggressive portfolio positions now (i.e. take some chips off the table) and, more importantly, to have a strategy in place for the next bear market, whenever it may arrive.

About Michael McGinley, CFP®, AIF®

Michael McGinley has worked in the financial services industry for over 15 years. He is currently a partner at Providus Advisors, an investment advisory firm located in Chandler, AZ.

Please Note: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities. Please visit our Important Consumer Disclosure for more information.