08/10/2021 Commentary

Hello,
Hope you’re enjoying the remaining days of summer with family and friends.  We wanted to take a moment to explain a few items of interest regarding the financial markets, interest rates and risk profile assessment. 
 
As many of you may know, the Federal Reserve has kept interest rates at emergency levels since the Global Pandemic began in the early Spring of 2020.  Prior to that, since the Great Recession of 2008/2009, interest rates for most of that time were extremely low compared to historical averages.  This has made it a very challenging investment landscape for those seeking a total return with low to moderate risk. 
 
If you were to make some comparisons…check your bank CD rates or your checking account interest.  These are likely yielding roughly .10% compared to the 10-year treasury yielding just below 1.50%.  To put this in perspective, the 10-year treasury was yielding 4.50%-5.50% just prior to the 2008/2009 Great Recession.  These are challenging times for low-risk investors.
 
What about the stock market?  This area of the financial market too appears fueled by low interest rates, “easy money” as some may refer to it.  The current price to earnings ratio of the S&P 500 is roughly 28 times earnings.  To put this in perspective, since 1871, the average valuation is 14.6 times earnings. 
 
For a more recent historical average, 1990, the valuation stood at 14.2 times earnings.  By 2000, 15.5 times earnings…2010, fair value rose to 17.8 times earnings.  Last year, 2020, earnings hit 19.7 times earnings.   An excerpt from James Paulsen, Chief Investment Officer with The Leuthold Group most recent newsletter stated the following:

“From 1990-forward, however, the average valuation of the stock market has been persistently climbing. As a result, for the entire time from 2000-to-present, the 30-year-average P/E ratio has been above the old valuation range. Furthermore, the trailing 30-year-average P/E multiple of 20.2x is more than 30% above the highest valuation ever reached between 1871-1989!

Clearly, for reasons beyond the scope of this note, during the last three decades, the U.S. stock market has established a new and much higher valuation range. Could it eventually return to the confines of the 150-year average? Absolutely. Will that likely happen any time soon? Probably not.”

Without question the stock market continues to adjust the valuation investors are willing to pay.  Earning thus far have continued to benefit from low interest rates, easy money from the Federal Reserve and company buybacks.

Will this continue and if so for how long?  The answer to that question is difficult.  Additional questions come to mind that will likely determine the direction of the stock market, at least in part.  Will the Federal Reserve continue easy money policy?  Will the Global Pandemic persist with additional strains that continue to create pauses in the economic recovery?
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With all this stated, if you would like to add stock market exposure to your portfolio, please let us know.  In addition, take just a few moments and complete the online questionnaire that will help to determine your tolerance for stock market risk.  It can be found by going to: www.GlobalWealthsolutionsLLC.com and then go to the “risk assessment quiz” tab. 
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SOURCE: https://advisors.leutholdgroup.com/research/paulsen/2021/07/30/what-is-the-sp-500s-normal-pe-multiple-202x-trailing-eps.23081

Advisory services offered through J.W. Cole Advisors, Inc. (JWCA).  Global Wealth Solutions and JWCA are unaffiliated entities