March marks the 6 year anniversary of the bottom of the stock market in March 2009 after the 2008 global financial crises. Since then we have had 6 years of positive U.S. stock market returns, which is unusual.
Remember that we invest for "future expected returns" and "past returns are no guarantee of future performance". Investing is like driving a car. We can’t drive by looking in the rear view mirror. We must scan the horizon through the much bigger and broader windshield.
One measure of U.S. stock market valuation, the Cyclically Adjusted Price Earnings Ratio (CAPE), devised by legendary value investors Benjamin Graham and David Dodd in 1934 and popularized more recently by Yale University professor and Nobel Laureate Robert Shiller, shows the U.S. stock market at the high end of historic valuation ranges. Put more simply (if that is possible for financial concepts), the U.S. stock market price is high relative to earning or profits of U.S. corporations and it is profits that drive prices.
What does this mean? It does NOT mean that a U.S. stock market crash is imminent. It DOES mean that future return expectations should be lower than long term averages. But many factors are involved. If U.S. corporate profits grow more strongly as the result of a stronger economy, then the U.S. stock market may perform better than CAPE indicates. Stronger employment and wage growth have been two elusive factors in this economic recovery which may pleasantly surprise us in the near future. As always, no one has a clear crystal ball and, as always, broad diversification is our best strategy. Note that all of the above information applies to U.S. stocks and international stocks, which have not risen nearly as much as U.S. stocks in the last 6 years may prove to be good sources of diversification.
One final thought: Identity theft continues to grab front page headlines, especially as we enter income tax filing season. Major corporate data breaches have provided a fertile ground of personally identifiable information. The Internal Revenue Service is reporting an increase in the number of fraudulent income tax returns filed, where someone gets a taxpayer’s Social Security Number and files an income tax claiming a refund. Not having criminal minds, we are not exactly sure how they do that and get away with it, but they do. Once again, we urge you to take seriously the multitude of steps that are available to protect your personal information, including careful management of passwords for the many websites we all use in today’s society.
As always, please contact us with any questions or news or comments.