The primary elections are behind us in Indiana and we are just months away from seeing who will be the new leader of the free world. Often times, the presidential nominations are all but decided before Indiana gets a chance to vote, but this election has been an interesting one on both sides of the ticket. The markets haven’t responded to election results yet. The daily volatility of the markets seems to jump or dive based more closely on the “here and now” vs. the “what may come to be”. In an April full of hope, where the Dow Jones finally hit 18,000 again, both the S&P 500 and the Barclays Aggregate Bond index ended the month flat.1
It was a year ago, in our April 2015 summary, that I lamented about how the markets seemed to be slowing down and the Dow, in particular, was stuck at the 18,000 level. It only took a few months to go from 15,000 to 16,000, then a few more to go on to 17,000 and 18,000. Alas, we have been in this 18,000 neighborhood almost a year and a half. The same stalemate pattern can be said of the S&P 500 and NASDAQ and if you have some international stock exposure, then you are likely down in value over that time period. This can be frustrating as an investor that sees gains briefly, but has them taken away. This period of consolidation can be downright stomach-turning as a retired investor that relies on market growth to support the withdrawals taken from their nest egg.
When trying to make sense of a sideways market, we look at the basics. Stock investing isn’t a short term venture. A strong economy, strong corporate earnings, attractive valuations can all be uprooted and tossed aside for short periods of time when stocks “misbehave”. However, when looking over longer periods, it becomes much harder for the markets to deny decent returns when the fundamentals support it. Below is a scatter plot of historical 5 year returns that proceed when stocks are at certain price-earnings (P/E) ratios. The S&P 500 has been hovering around 16.7 P/E levels for over a year now. Although a 1 year scatter plot is messy with little correlation, the 5 year return scatter plot shows a tighter pattern. It doesn’t guarantee that stocks are positioned for strong returns, but the chart suggests there is a reasonable likelihood of growth at around a 10% average annual growth rate.
There is still plenty of 2016 ahead of us, ripe with election coverage and a plethora of other headlines. Plenty of potential excuses for growth trends to not follow the trend in the chart, but eventually the markets will have to obey the fundamentals… and the fundamentals still look good.
Have a blessed May and enjoy all that this rain is providing.
1 Thomson Financial
Index information is used to represent market performance, but you cannot invest directly in an index. Past performance is not indicative of future results.
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