Skip to main content

Sound Advice: July 20, 2022

Tops and Bottoms 

With all due respect to those who in hushed tones profess to know the precise levels of high and low points of the investment markets, no one has such a vision of the future.  At best, this information is available in retrospect, not in advance.

Over the latest decade and a half, there have been four market tops and three market bottoms.  The fourth bottom may have already occurred or it still may lie ahead.  The first of these peaks was on March 24, 2000, just before the market was en route to a 49% plunge, which continued until October 9, 2002.  Those were the days of the dot.com companies with great stories, but no profits.

The second peak was on October 9, 2007, the precursor to a 57% drop in the averages, which ended on March 9, 2009.  That 17-month pullback reflected the chaos in the financial markets that nearly brought the system to a halt.

From that time until February 19, 2020, the Standard & Poor’s Index rose 401% before hitting the wall of the coronavirus pandemic.  In the five weeks that followed, the S&P nosedived 34%, then more than doubled by the beginning of the current year.

The lesson to be learned here is that of relative valuations.  In the latest quarter-century, the average valuation of the S&P Index has been 16.9x earnings.  What does that mean?  This index consists of large and small companies.  The earnings of the index reflect the trends in the profitability of those companies.  What’s important is the rate of change over time.  As growth accelerates, valuations increase.  And vice versa.

During recessions, growth disappears temporarily and valuations shrink.  When growth resumes, valuations widen.

So it should come as no surprise that during the low growth decade from 2000-2010, the index valuation shrank from more than 24 times to less than 10 times in the midst of the banking crisis.  By last year, thanks to a subsequent acceleration of corporate growth, it had worked its way back over 22 times, once again in rich territory.

Although high valuations alone do not lead to market weakness, unfavorable economic and geopolitical events often light the spark that sends the indexes lower.  That has been the case this year.

On June 30th, the valuation of the S&P had dropped to 15.9x earnings, which is not far from the low points of recent market bottoms.  Whether there’s more slippage ahead remains to be seen, but it seems likely that we are in the neighborhood of where the next advance will begin.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com

 

Any questions?  Please contact me at nrwayne@soundasset.com

Comments

Post a Comment

Popular posts from this blog

Sound Advice: July 8, 2020

Jobs Are Up, But So Are New Infections Through the spring months, m ost of the economic data was extremely negative, with record declines in employment and consumer spending.  The speed of that decline had no modern precedent. We are now in a recession.   The shortest recession on record occurred in 1980 and lasted just six months.  Second place goes to a seven-month recession in 1918-19, which was tied to the Spanish flu pandemic.  The big question is: When will this recession end? Given surprisingly strong data in May, April may have been the bottom of this economic cycle.  If so, it will have been the shortest recession on record.  With massive support from the Federal Reserve, the federal government, and the reopening of previously closed businesses, employment surged unexpectedly.  At the same time, pent-up demand, stimulus checks, and generous unemployment benefits led to a reacceleration of commercial activity. Still, not all is rosy.   In his recent testimo
Post a Comment
Read more

Sound Advice: December 13, 2023

What You Need To Know About Long-Term Care Insurance Long-term care insurance (LTCI) is a type of insurance that helps cover the costs of long-term care services, such as assistance with activities of daily living (ADLs) such as bathing, dressing, and eating. It can also cover the expenses associated with care in a nursing home, assisted living facility or at home by a professional caregiver. Here's what you need to know about long-term care insurance: 1. Not Covered by Health Insurance or Medicare: Long-term care services are generally not covered by health insurance or Medicare, which only provide limited coverage for skilled nursing care and rehabilitative services. Medicaid covers long-term care, but you need to meet strict income and asset requirements. 2. Costs of Long-Term Care: Long-term care can be expensive and can quickly deplete your savings. LTCI helps to cover these costs, providing financial security and ens
Post a Comment
Read more

Sound Advice: December 27, 2023

“Well, we have a whole new year ahead of us. And wouldn’t it be wonderful if we could all be a little more gentle with each other, a little more loving, and have a little more empathy, and maybe, next year at this time we’d like each other a little more.” ― Judy Garland   N. Russell Wayne, CFP Sound Asset Management Inc. Weston, CT  06883 203-895-8877 www.soundasset.blogspot.com  
Post a Comment
Read more