The beginning of 2016 brought extraordinary volatility to domestic equity markets, stoking fears among many analysts and average investors that the global economic recovery had begun to stall. By the end of the third quarter, the S&P 500 had edged up by 7.84% for just the first nine months of the year. We view this growth in the face of skepticism, along with mutual and exchange traded fund flow data, as two hallmarks of a maturing (but not yet mature) bull market.
While absolute valuations (compared to historical averages) are a tad high for the U.S. stock market; relative valuations (compared with current yields on cash and bond investments) remain attractive. As can be seen in the chart below, a record number of the 500 stocks in the S&P index are paying current dividends in excess of the 10-year Treasury yield. In addition to enhanced current yield, dividend payments on stocks tend to keep pace with inflation over time.
This stock/bond comparison might normally lead investors to flee from bond holdings in order to buy stocks in droves. However, this has not been the case. In fact, the chart below, shows the opposite. Typically, equity markets peak amid large inflows to stock funds and excessive optimism. Instead, investors have aggressively trimmed equity holdings and purchased low yielding bonds. This indicates potential further gains.
As we search for the telltale signs that our bull market is aging, the lack of extreme optimism and reduced equity holdings are encouraging contrarian indicators which we must balance against modestly stretched valuations. The data points above still lead us to believe this bull has longer to run before a major shift in strategy is warranted.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
