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The End is Near:
Gather 'round and we will tell you an investing tale that is sure to chill you to your bottom line. Friends, we regret to inform you: The End is near. This AI-fueled market frenzy cannot continue forever. Schwab and Bloomberg rate the S&P 500 "very expensive" (in the 80th to 100th percentile) when you look at price to earnings ratios; price to book ratios; price to cash flow; price to dividend yield; and market capitalization to gross domestic product.
We have talked about this before, but the S&P 500 is a weighted index. The 500th smallest company makes up a very tiny percentage of the overall index. The biggest companies make up a larger portion. Right now the top 5 stocks (NVIDIA, Microsoft, Apple, Amazon, and Alphabet) make up nearly 30% of the entire index.
The last time the S&P was so heavily weighted in just a few names? 1999. Back then Cisco, Intel, Microsoft, AOL, and General Electric were the biggest companies in the land.
The End was near in 1999, 2008-2009, 2011, 2020, 2022... and again just in April. Eeek!
Since 1974 there have been 27 market corrections and 6 bear markets. Most arrive with frightening and unsettling speed. But most resolve quickly too. So we need to be just as prepared for The Beginnings.
We are up 38% (!) from the April lows. And 9.5% of that came on April 9th. If you got scared out of your wits and got out of the market, you likely missed the biggest bounce off the bottom. Timing the market well means you have to be right (or lucky) twice. Getting out is hard enough. Getting back in at the right time? That's a fool's errand.
In fact, over the last 20 years the S&P 500 has averaged 10.4% per year. But if you missed just the 10 best days during that period, your average return drops to 6.1%.
So is The End really near, you ask? We don't actually know. Sorry. But we are certain that volatility and big market drops come with the territory. We don't have to like it. But if we want to outpace inflation and successfully fund our goals, it's the bargain we must accept.
Here's what we know for sure: We are not market timers. We are planners. We have crafted a plan for you that prioritizes cash flow and is sensitive to your ability to tolerate risk and volatility. The warm blanket for this scary story is a conversation with us about your risk tolerance and a discussion about whether your asset allocation needs rebalancing. We're here to help. Let us know if you'd like to talk. (And if you want to geek out on the data used here, we're happy to email you Schwab's 4th Quarter Chart Book—a 70+ page monster of economic charts and data.)
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