Though the last decade has been rough on a lot of investors, the last 5 years have been banner ones. The S&P 500 has more than doubled from its 2009 lows, and many investors are seeing their investment portfolios begin to make gains above their 2007 highs – adjusted for withdrawals in some instances.
Key Takeaways:
- Markets correct regularly, and it is a normal occurrence.
- Taking a long-term approach to investing and regularly reviewing one’s long-term objectives can help mitigate the emotional roller coaster of market moves.
- A comprehensive, consultative approach can help achieve long-term goals.
- A Second Opinion can help.
Market Corrections: Part of Investing for the Long Term
Do you remember the market corrections of the last decade or so?
We’ve had two severe market moves to the downside, 2000-2002 and 2007-2009.
While the magnitude of these corrections may be aberrant in history, corrections themselves are not uncommon and all investors should be mentally and emotionally prepared for the prospect of yet another normal correction in the market.
On average, equity markets correct:
10% every 12 months, and
20% every 24 months, and
30% every 60 months.
The S&P 500 corrected -16% in the summer of 2010, -19.4% in 2011, and -9.9% in 2012. Since 2012, we have not had a 10% correction. That means that statistically, we’re due for one!
Other factors we observe for indications of where we might be headed are:
The Average Valuation Levels of the US equity Markets – CAPE 10
New York Stock Exchange (NYSE) Bullish Percent Indicator
CAPE-10 is the indicator we like most. (The Shiller 10-Year Cyclically-Adjusted Price to Earnings Ratio, abbreviated CAPE-10.) The CAPE-10 has been at historically high levels since 2011, running in the low to mid 20s (historical average is about 16.5).
Now, just because the CAPE-10 is at historically high levels, this does not inherently mean that prices must come down. As we see, it is a ratio. The levels can return decline to normal through either a decrease in the price level of the markets OR an increase in the average earnings of the companies in the index (in this case the S&P 500), or a combination of the two.
To give an example of the volatility of this metric, the high was 27.55 in May 2007 with a low coming in at just about 13.32 in March 2009. While this kind of volatility is rare, it illustrates how it is possible for the valuation levels to change over time. As of this writing, the CAPE-10 is around a 26, indicating historically high valuations. Please understand once again that this does not mean we are in for a market crash, but rather that things are a bit frothy and that a correction may likely be in the works.
Another indicator we look at is the New York Stock Exchange (NYSE) Bullish Percent Indicator. This indicator evaluates market technicals for over-bought or over-sold conditions on a shorter term than the valuation-based CAPE-10. Moderate levels are between 30% and 70%, while anything under 30% and over 70% are considered to be lower risk and higher risk, respectively. The chart level bottomed out at 18% during the 2011 correction, and has been at or above 70% for more than a few months this year.
Currently the chart is declining and is at about 60%, down from its highs of 74% earlier this year. This means that we are at lower risk levels today (60%) than we were in July of this year (74%). A pointer about this indicator – it is not a forecasting tool. It is kind of like indicating the road conditions for driving. Higher values indicate more traffic, more rain, more road-work—conditions that make driving a bit more interesting and possibly more risky. Lower values are generally indicative of lower risk levels—dry conditions, fewer cars on the road, and no roadwork.
A Long-Term Perspective is Key
Because we do not believe timing the market is consistently possible, we generally do not act on these indicators in a short-term tactical manner. We do use them to gauge and help prepare our clients for what kind of market conditions we may be expecting in the near to intermediate future. We rely on our strategic, long-term approach to investing to help us weather the storms. Instead of choosing to drive or not to drive (to invest or not to invest), we choose to purchase a high quality automobile like a Mercedes, with the latest safety features and highest crash ratings (broad diversification with trusted managers, and in some instances protected income vehicles). This helps ensure that we have a high level of confidence in our ability to travel with you down the road.
We have been cautioning investors with new money about what they may encounter in the next 1-3 years, and to take a few steps back, a few deep breaths, and then to take a long-term view of their investment portfolio. We continue to monitor both our strategic direction in investing, and we take a proactive approach with advanced planning areas to help you make the most of your resources in order to achieve everything that is important to you.
Second Opinions Can Help
All new clients and many existing clients have been recently introduced to our new advisory model through the first step: a comprehensive discovery interview. We have found this process to mutually be very beneficial and informative. Clients have found it to be enlightening and constructive by identifying their highest values, goals, and provide logical action steps towards making even greater strides in their financial decision-making. IF you have not already done so, we encourage you to contact us to schedule a Discovery Meeting to begin this new consultative advisory process.
We have also begun offering a Second Opinion service to the friends and families of our clients. Our Second Opinion service includes a Discovery Meeting, an Investment Plan document and Investment Policy Statement where we analyze where they are, where they want to be, identify any gaps, and provide guidance as to how to bridge those gaps to achieve what is important to them.
Its generally a multi-meeting process and represents about a $4,000 value, though there is never any obligation or expectation on our part. We’ve had amazing feedback from clients and non-clients alike who have gone through this process, and it is a way that we can help your friends and family. We are more than pleased to offer this service – again without cost or obligation.
Please know that we particularly appreciate those of you who have been our clients – in some cases for many decades! Clearly we could not do what we do without your faith, favor, trust and support – for which we heartily say Thank You!
Happy Autumn!
| Jeremy S. Mitchell, CFP® | Larry R. Mitchell |
| Wealth Manager | Registered Principal / Branch Manager |