The stock market has been on an amazing run. Over the last 15 years, the S&P 500’s average annual return was in the mid-teens, well above its long-term average of around 10%. The last two years extended this climb, leaving most major indexes near all-time highs.
Greed is on the rise
Signs of euphoria have emerged. Valuations are stretched, with the market trading at over 28 times trailing earnings versus a long-term average of 18 times. After the election, just eight stocks accounted for 85% of the market’s increase in November and December, while the other 492 members of the S&P 500 did little to help performance. If you weren’t in the eight BATMMAAN* stocks, 2024 may have ended on a sour note.
Not surprisingly, we don’t think chasing returns is a good idea. As Warren Buffett quipped, “be greedy when others are fearful and fearful when others are greedy.”
Review your risk tolerance
With signs of greed in everything from AI stocks to bitcoin, now is a good time to reassess your risk tolerance. An average bear market for stocks is a -34% drop, with the full bear cycle lasting on average 35 months. If your stock investments fell by this amount, would it affect your ability to sleep at night? If so, it may be time to reassess your allocation between stocks and bonds (we can help).
We see opportunities
Even with euphoria in some sectors, we still see opportunities. There are attractive valuations in health care, industrials, consumer staples, and energy. While these industries may not have the growth prospects of some technology names, they have defensive characteristics should the market decline, they pay solid dividends, and many of their valuations are one-half or even one-third the general market.
We're always happy to discuss your portfolio, your goals, or our investment philosophy. Contact any of our team members at 800-998-9773 to set up a meeting.
Data Sources: Koyfin, Shiller Online Data Set, FRED, S&P Global, MarketWatch, Allied
*The BATMMAAN stocks are: Broadcom, Apple, Tesla, Meta, Microsoft, Amazon, Alphabet, and Nvidia