On Tuesday, March 5, The Dow Jones Industrial Average (DJIA) set a new record close at a level of 14,253.8 (old record of 14,164.5 was set on 10/09/07). Since then it has gone on to set four more consecutive record-closing highs. The S&P 500, at a closing level of 1556.2 on 3/11/13, is still about nine points shy of its record high of 1565.2 (also set on 10/09/07), but it is up seven days in a row and the odds of that occurring are about 1.17%. In addition, The Chicago Board Options Exchange Volatility Index (the “VIX”, a contrary indicator) sits at 11.56 which is its lowest level in over six years. Lastly, the S&P 500 has a total return of 15.85% since its post-election low on 11/15/12 which is 58.86% on an annualized basis. Add it all up and it does not take much of a stretch to realize the U.S. equity markets are most likely due for a pause or a measurable correction (3 – 10%). Given this, many questions come to mind such as, will the correction actually occur? Can investors time these corrections accurately and routinely? If the U.S. equity markets do begin a correction in the near term is this the end of this bull market which turned four on 3/9/13 and has seen the S&P 500 post a total return of 150.66% (3/9/09 – 3/11/13)?
Taking the later question first, we do not believe if the U.S. equity markets correct from these now historic levels that will be the beginning of the end for this bull’s current run. We would simply view it as a normal correction. Based on our research a normal bull market experiences a pullback of at least 3% on average about every 90 days. In other words, even strong markets don’t go straight up. However, they can go straight up (and straight down) for much longer than investors can imagine and theorize and that is why we are not big believers in trying to time entry and exit points inside of a bull market. Instead we encourage investors to systematically add to positions (dollar cost average) regardless of the current level using weakness to become more aggressive. In addition, they should use times of strength to reallocate some of their assets out of outperforming areas (sectors, themes, market capitalizations, etc.) to areas that offer more relative value.
Clearly, there are still many hurdles and reasons (Europe, sequester, payroll tax hike, tensions on the Korean Peninsula, etc.) to not be an investor at this juncture and these continue to be highlighted by the media (perhaps in excess). However, we still believe there are many reasons to conclude there is more to come from this four-year old bull market. These include strong corporate performance like earnings and revenue growth, balance sheet strength and continued historic dividend growth. We also are seeing improving signs on the employment front and a strengthening recovery in the automobile and housing industries that should bleed over into other areas of the economy. In addition, with a P/E (price per earnings) of 15.32 for the S&P 500, valuations don’t look stretched especially given earnings are expected to grow 10.43% over the next year. Yes, we do expect there to be bumps in the road (3%+ pullbacks). Yes, we are definitely due for one of those bumps. However, we think investors are best suited looking out over the long-term vice than trying to time in the short term.
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com/blog.
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