August 1, 2017 the Dow Jones Industrial Average hit 22,000 points — a 20% increase from election season as well as an all-time high! The rise was attributable to strong earnings by Apple and other companies. Read on for some insights and opinions from experts and commentators about what may be ahead.
While the U.S. stock market hits red-hot highs, many investors wonder if a market correction may be ahead. With reports of upbeat corporate earnings in, the Dow Jones reached 21,982 points on Tuesday, at one point reaching an intra-day all-time high of 21,990.96 points. As of last Friday, 73% of the S&P 500 companies posting earnings reports had sales figures above estimates, as reported by FactSet.
Likewise, other indices saw growth. The S&P 500 attained 2,476, just a few points shy of its record-setting high at 2,484.04 in the week prior. And the Nasdaq rose to 6,375, putting on the pathway to setting a new record of its own.
While nobody knows what the future holds, economists and stock market experts say there is a growing possibility the market will end its current upward trajectory and correct itself. And the issue? Potentially overinflated stock valuations.
“There are many indicators showing that equities have reached a higher valuation than is consistent with changes in either underlying economic growth or revenue fundamentals,” commented Aaron Klein, a fellow in Economic Studies and Policy Director for the Center on Regulation and Markets at the Brookings Institution, to NBC News.
With stocks holding steady against political dysfunction in Washington, D.C. – not to mention as-yet-to-be-delivered political pledges for healthcare and tax reform – it’s difficult to forecast where market trends may head. But if you’re in your fifties or older, being prepared to weather the effects of market volatility on retirement money is critical.
Here’s a quick look at some insights from various commentators and experts – and why you and other retirement investors may want to consider wealth preservation strategies while the value of your retirement assets is healthy and strong.
What’s the Word on the Market?
Mark Zandi, chief economist at Moody’s Analytics, points to high price-to-earnings ratios as a top indicator of future market activity. “Valuations are high by any historic standard,” he told NBC News. “This market is very vulnerable because it’s very highly valued.”
In a piece on MarketWatch, Howard Marks, co-chairman of Oaktree Capital Management, opines that “this is time for caution.” One of the factors he point to is trailing 12-month price-to-earnings ratios S&P 500 stocks running at 25 times. Another benchmark of valuations, the Shiller Cyclically Adjusted PE Ratio, lingers at its highest level since only two other times in economic history: in 1929 and 2000, respectively.
In the same article, Art Hogan, chief market strategist at Wunderlich Securities, notes that with the Dow hovering near 22,000, a 5% dropoff would entail a 1,100-point loss. His verdict when asked whether the market would be ready for that sort of steep drop?
“I would say no because we’re out of practice. Your usual standard garden-variety volatility just hasn’t been around, and we haven’t seen it for 12 months,” he explained to Mark Decambre of MarketWatch. “Quiet markets have been the norm and not the exception and I think a major pullback is going to feel a whole lot larger for lack of experience and the numbers are larger.”
However, as Decambre notes, the Dow hasn’t seen a 5% drop since 2011, and before that it hadn’t experienced one since 2008, at which it went through 9 drops.
Still, as Ryan Detrick, senior market strategist at LPL Financial, notes, when someone looks at the S&P 500, there are insights to be gained. Going back to 1950, the S&P 500 has posted a 5% downfall at least 61 of the past 67 years – or 91% of the time. “We’ve been historically spoiled so far this year, but as the economic cycle ages, we fully expect more volatility the remainder of this year and the likely 5% correction to take place as well,” Detrick commented.
Jeremy Glaser, editor of Morningstar, believes that at their current prices, stocks may be overvalued by 4%-5%. He points to how stocks were undervalued by 50% less than 10 years ago, when the market hit rock-bottom in the wake of the financial crisis.
“Stocks do look fairly expensive today. When you see markets hitting new records on a pretty regular basis… if anything doesn’t go to plan, there’s not a lot of margin of safety built into the market,” he said.
An Alternative Viewpoint: No Bubble in Stocks but One in…. Bonds?
In other recent headlines, Alan Greenspan, Former Fed Chairperson, has an alternative take on economic conditions. The real concern is not in the stock market, but in the bond market, where inflationary pressures can take their toll, he says.
“By any measure, real long-term interest rates are much too low and therefore unsustainable,” Greenspan told Oliver Renick and Liz McCormick with Bloomberg News. “When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”
Greenspan argues that surging interest rates will affect bond values and thereby undercut stock performance. “The real problem is that when the bond-market bubble collapses, long-term interest rates will rise. We are moving into a different phase of the economy — to a stagflation not seen since the 1970s. That is not good for asset prices.”
As the Bloomberg article observes, Greenspan shares these observations based on the Fed Model, or a theory holding that as long as bonds are rallying quicker than stocks, sticking with the lesser-inflated asset of the two is the right course of action.
Looking at 10-year inflation-adjusted bond yields, which were hovering at 0.47%, there is a 4.7% gap with the earnings yield from the S&P 500. Renick and McCormick observe that is 21% higher than the 20-year average. And with interest rates on a quick rise, investors would be incentivized to dump their stock holdings, according to Greenspan.
Some Factors to Consider for Retirement Investors
For many years, you and other investors have focused on wealth accumulation. You may have made financial decisions with the goals of accumulating as many assets and building up as much savings as possible. Your aim may have been to obtain a bigger stockpile of retirement money and other financial reserves for your needs, goals, and objectives.
But in retirement, things change. It’s prudent to shift the focus to income – namely your lifestyle expectations, the income you will need to pay for them, and protection strategies you should have in place to ensure your money lasts for the entirety of your retirement.
If you are in the “retirement red zone,” or 10 years before retirement or the first 10 years of your retirement timeline, then it’s a critical period. Now is an ideal time to start looking for ways to preserve your wealth so you have dependable sources of income for all your retirement years.
In the last market crash in 2007-2008, stock indices fell by as much as 47%. Americans lost $2 trillion in retirement savings in their defined-contribution plans. Should people sustain financial losses early in retirement, it raises sequence-of-returns risk — or the danger of your future withdrawals becoming unsustainable. As one retirement planning questionnaire showed, just 34% of Americans understand this possibility. However, this need not be a question you consider alone. Financial professionals here at SafeMoney.com stand ready to help you.
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