By Allen Giese, CLU®, ChFC®, ChSNC®
For 34 years, I’ve been tuned into the financial media, and I can tell you with some certainty that the mainstream perspective takes one of two stances.
After stocks have a pullback, the bears come out to play, and maybe we’re even threatening a recession. Journalists are right there to tell us that yes, while stocks have gotten cheaper, they still can get a whole lot cheaper and we’re probably staring in the face of a financial crisis. Don’t buy.
And after stocks have gone up, those same journalists tell us markets are overvalued and stocks are overpriced. They really can’t go up any further, so … don’t buy.
As I sit here on a chilly February morning in South Florida (it’s a ghastly 53 degrees—not sure how we’re even able to live like this), I’m trying to recall a time when the financial media gave a resounding “BUY” call on capital markets. Perhaps it’s the effect of the cold, but I really can’t recall any.
Yet, if you had invested $100 into the S&P 500 in 1990 (when I started my career), you would have about $2,604 today. That’s an annualized 10.17% return, and you would have beaten inflation by about 7.43% annually. One would think there would have been at least a few moments in that time span when “Don’t buy” wasn’t very good advice.
What we are talking about here is market timing. Is there a way to judge if markets really are overpriced and perhaps it is in your best interest to sit it out and buy that attractive 5.1% CD instead?
I won’t disagree that with the S&P hovering just below 5,000, its price-to-earnings ratio is higher than average. Looking up FactSet’s consensus earnings estimates for 2024, the P/E is 20.0 for 2024, well above the 10-year average of 17.6 and the 30-year average of 16.6.
Some recent perspective: In March 2000, the 12-month forward consensus P/E was 25.2, and in January 2022, it was 21.4. So yes, 20.0 is definitely on the high side of the average, but it is certainly not unprecedented. (On a side note, a dollar invested in March 2000 would be about five dollars today. I’d wager there are a lot of people today who’ve been trying to time the markets these past three to four years that would be very happy to have gotten that return.)
So, is valuation a useful and accurate market-timing tool? I contest that the overwhelming statistical evidence I’ve seen over these past 34 years suggests it’s not—and that neither is anything else. Markets can’t be consistently timed, primarily, I believe, because the economy can’t be consistently forecasted.
I like what the late Charlie Munger (Warren Buffett’s closest partner and right-hand man, whom we lost in November 2023) said about long-term equity investing and compounding: “The first rule of compounding is never to interrupt it unnecessarily.” Sage advice.