On March 23, 2000, the most widely used index of stock values, the S&P 500, reached 1,527. Over the next 2 1/2 years to September of 2002 the index dropped in value by 47 percent.
During the first week of October 2007, the S&P 500 rose to 1,561, and then again lost 56 percent in the following 18 months to March 2009.
Now just this week the index once again rose above the 1,500 level to 1,520. Having endured both previous trends, I find myself taking pause at this event, and wonder who among us with any memory would not do the same.
Before I go any further, let me reiterate that I cannot, and do not, endeavor to provide investment advice in this column. Media sources should not be used in this way.
It is also impossible to truly predict the behavior of the stock market. We can use fundamentals to identify potential value, but fundamentals inevitably change. We can use charts to identify potential price trends, but charts only reveal the past; never do they foretell the future.
In this case the fundamentals are solid. Corporate earnings have been strong and according to Reuters, 70 percent of companies have reported profits exceeding analyst expectations. Despite strong and growing profits, stock prices continue to trade at historically “reasonable” valuations as indicated by the average price to earnings ratio of stocks in the S&P 500.
At the same time, financial alternatives to stocks are dry and bitter to say the least. Bank deposit products and money markets continue to offer virtually no return, and bonds across the spectrum look to provide too little return for the risks they present.
These tailwinds give me confidence, and I want to believe this market has what it takes to make new high, after new high. But then there’s the chart.
Forget the short-term technical charts, just take a look at the long-term chart back to the year 2000. As I said, charts never tell the future, but if price patterns are worth anything at all, then this one looks obvious: look out below.
So how about a middle ground? Most stock market based investments returned double digits gains last year, and are up over 6 percent in just the last month and half. Instead of trying to time the market, maybe now is simply a good time to visit your overall exposure to stocks and adjust it if needed.
If you’re asking where to put the money instead, I have no answer quite yet. But I’ve been investing a long time, and I don’t ever remember kicking myself for taking some gains off the table.