Page 17 - March 2018 Senior Scene Magazine
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Are Stocks
Senior Scene® | March Issue
Are stocks now overbought, or expensive? It depends
if that same investor can  nd a better deal. Here we have investment theory in a thimble. If there is a similar deal for less risk, or a better deal for the same risk, then stocks may be too pricey at a P/E Ratio of 24.6, or returning 4% to the bottom line. A current alternative to the S&P 500 Index may be Bonds, Gold, Real Estate, CDs, etc... Once the door has opened and the big money begins to switch asset classes, the deluge usually begins and almost always the little inves- tor is left behind.
Remember on December 5th, 1996 when then Federal Reserve Chairman Alan Greenspan commented that the current stock market is in a state of “Irrational Exuberance”? Mr. Greenspan was eluding that the markets were grossly overheated. The S&P 500 P/E Ratio was 18.2. In the next
3 1⁄2 years, the S&P 500 doubled! Greenspan was brutally wrong.
Is the broader stock market expensive? Ponder this one: According to Google Analytics, if you had invested $100,000 into the S&P 500 Index in February of 1998 and left it untouched and allowed all dividends to be reinvested until February 2018, you would own a $388,000 portfolio. This would represent a 7.02% average annual return before adjusting for in ation or a 4.79% return after adjusting for in ation for the last 20 years. I’ll let you decide if these re- turns are excessive, about right, or too low given the seem- ingly high level of risk that the stock market provides. Some analysts say that if you leave your funds untouched in the broader markets (S&P 500 Index) for many years, say 20 or 30 years, your risk is drastically reduced towards zero. With
STOCKS Continued on page 53
By Jason ValaVanis, CFP®, ChFC (321) 956-7072
Ask any set of investors and you’ll most likely get very different responses. The broader stock market, like the S&P 500 Index, (The Standard & Poor’s 500) is a collection of 500 of the largest corporations in America. It is the most reputable subset of traded stocks in the world. The sta- tistical tracking of its price performance and its underlying economic metrics is a useful thermometer of the economic health of our Country.
Interestingly so, the value of the broader stock market is a multiple of its earnings. Let’s choose one hypothetical stock, XYZ Corp. If XYZ Corp was trading at $30/share and its annual earnings were $2/share, hence the Price-to-Earn- ings Ratio (P/E Ratio) is 15. A lower P/E Ratio would indi- cate a “cheaper” stock price and a higher P/E Ratio would indicate a “pricier” stock price. You see, the price alone is meaningless. You also need to know the earnings per share in order to formulate the P/E Ratio. This way stocks can be compared to one another.
Historically since 1870, the average P/E Ratio of the S&P 500 is 15.7. The lowest was 5.3 in 1917. The highest was 124 in May of 2009. (Yikes!) Maybe the big market crash in 2008-2009 was foretold? Currently, as of February 15 this year, the P/E Ratio is 24.6. This indicates the aver- age earnings power of the broader stock market is about 4%, or 1/24.6. In layman’s terms, it means investors are willing to place cash into stocks anticipating an average of 4% annual return, or $1.00 for every $24.60 invested. Capi-
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