Watching someone invest in this stock market can be like watching novice skiers start down Pallbearer's Peak: You just hope they know what they could be in for.
For advisers, putting fresh money to work in today's market can be particularly worrisome. The Standard & Poor's 500 stock index currently sells for 21 times its past 12 months' earnings, versus its historical average of about 17 times earnings. Noted hedge fund manager Seth Klarman warned his investors recently that valuations were at perilously high levels. Normally, there's a mild downturn — 5% or so — when the Dow Jones Industrial Average crosses a 1,000 level. That hasn't happened since the index crossed 18,000, notes Sam Stovall, chief market strategist for CFRA.
Valuation isn't all that investors have to worry about. The stock market is nearly a month away from its eighth birthday, making it roughly 95 in human years, jokes Doug Ramsey, market strategist for the Leuthold Group. “The old bull not only refuses to die, it has us wondering if it's discovered some sort of financial-asset Fountain of Youth,” he remarks in his most recent client letter.
The Federal Reserve is widely expected to raise short-term interest rates two or three times this year. And continued uncertainty about regulation, trade and immigration continue to inject uncertainty into the market. A trade war evokes the specter of the 1930 Smoot-Hawley Tariff Act, which is widely blamed for worsening the Great Depression. And as the
Trump administration realizes that tax cuts, trade agreements and deregulation take time, some of the market's post-election rise is starting to seem premature.
And normally, you want to invest money when things look rotten. At the beginning of President Obama's first term, the S&P 500 sold at 11.4 times earnings and the unemployment rate was nearly 10%. From an investor standpoint, current conditions in the Trump era aren't just good, writes Mr. Ramsey. “They're too good: a nearly full-employment economy, inflated market valuations, and relatively high corporate profit margins.”
Nevertheless, market strategists remain remarkably sanguine about stocks' prospects. “Is it as good a time to invest as 2009? No,” said
Robert Doll, chief equity strategist at Nuveen. “It will be more about what the economy and earnings do from here. But it will be OK. I'd guess for the next 10 years we'd see 5% to 7% growth in the stock market.”
So how do you put money to work here? One suggestion: Don't overlook growth. “Normally, after eight years of a bull market, you'd say, 'OK, time to move to the sidelines,” said James Paulsen, chief investment strategist and economist for Wells Capital Management. “But this bull market, until recently, was led by some of the most defensive sectors. All of the defensive stocks have been bid up. People stuck to U.S. stocks because they were scared; they stuck with large cap because they were scared; they stuck with dividend payers because they were scared.”
In part, that's because investors had previously suffered through the worst bear market since the Depression. But high-yielding stocks, typically the domain of the risk-adverse investor, have fared well because the Federal Reserve has kept interest rates so low for so long. Does this mean it's time to wade into technology stocks? Not necessarily. But
foreign stocks haven't been in a bull market as long as U.S. stocks have. And, Mr. Paulsen said, he thinks the rally in the dollar is near its end. “I believe one of the surprises this year will be a weaker dollar,” he said.
Mr. Stovall agreed. “On a rolling five-year basis, the MSCI EAFE index is below the mean. If you own international stocks and were thinking of dumping them, maybe you shouldn't do that.”
Another consideration: Try a balanced approach using a low-volatility index. Putting 40% in bonds is simply a safety measure that has worked well over time, Mr. Stovall said. And the low volatility index is reconstituted every quarter, which tends to reduce the number of overvalued stocks in the index.
Mr. Doll noted that if you have a client who has cash that needs to be deployed, it doesn't have to be deployed at once.
“If you had $3,000 earmarked for the stock market, I'd say put $1,000 in now,” Mr. Doll said. The next $1,000 should be put in at a rate of $100 month the next 10 months. And the third $1,000 should be invested at the next pullback. “That's the hardest thousand,” he said.
