Steller Return For The S&P 500 Going Into the Holiday Season
By now, most investors are aware that the S&P 500 is doing phenomenal this year. As of Thursday’s close, stocks are up 25.88% Total Return (including dividends) compared to its historical annual average of about 10%. With such a strong year, investors are beginning to think the markets have gotten ahead of themselves.
Looking at the data, we don’t believe long term investors need to panic at these levels. The S&P 500 does not look dangerously overvalued by conventional metrics. The forward 12-month P/E ratio for the S&P 500 is 17.5, just above the 5-year average of 16.6[i], which is nothing compared to the extremes we saw in the dot.com era that led to one of the biggest market crashes in history.
Investors sometimes forget the terrible fourth quarter we had in 2018, that almost ended the bull market, pushing stocks down almost 20% from it’s 2018 peak on September 20th. Naturally, after such a big downturn, stocks were poised for good returns, which is what we’ve experienced this year. However, compared to the September 2018 top, the S&P 500 is up an average 8.4% Total Return.
Looking at it from another perspective, the fourth quarter traditionally has seen positive returns, helping the S&P 500 produce good year end numbers. If the averages play out this year, we would expect to see stocks close a bit higher than today’s level. Going back to 1950, December has been a good month for equities coming second only to the month of November.
In those 69 years of data, the S&P 500 has been positive 72% of the time going into the month of December (similar to what we are experiencing today). Out of those 50 years with a positive return at the start of December, 80% of the time the month of December produced a positive result.
It is impossible to know what the markets will do in the short run, but it always helps to know when the odds are in the investor’s favor.
The Surevest Investment Committee is data dependent and we will continue to monitor the macro and market environment for potential dangers. However, for now, a big pull back is not in the cards simply because we’ve had a strong year so far.
