It appears the October government shutdown did little to slow the economy or dampen the U.S. markets. Not only did the U.S. economy weather the potential setbacks well, but the major indexes hit record highs in mid-November as investors returned to the fold after the massive exodus in 2008. Janet Yellen, slated to replace Ben Bernanke as head of the Federal Reserve in the New Year, is expected to continue the Fed’s stimulus policy for awhile – though no one likes to guess exactly how long that might be.
Consider the mood of individual investors. Their optimism has lifted the Dow Jones Industrial average (DJIA) some 900 points since early October, with the DJIA breaking the 16,000-point barrier on Nov. 18. Further evidence of a major shift in sentiment was documented in a recent survey released by Federated Investors (conducted by KRC Research, an independent third-party research firm). Nearly four times as many high net worth survey participants (who held at least $500,000 in investment instruments) were planning to add equities and balanced strategies as compared to bonds to their holdings.
Overall, the economy in the United States has come through a rough patch and is looking forward with some optimism to improvement in 2014. Inflation remains low and the Fed has indicated it will remain supportive with money policy. Worldwide, economists are predicting continued modest improvement. Europe has emerged from the recession and China’s economy appears to have stabilized.
Some investment experts remind clients that the fiscal problems have not gone away. Several important deadlines loom in the first couple of months of 2014, including the U.S. budget and the deficit ceiling. Although it is unlikely that there will be a disruption like there was in October, there still could be some choppy waters ahead.
Inevitably, when indexes approach record highs, the pessimists begin to worry that a stock market bubble might form. It has been more than two years since the market hit any sort of slump, and the bears are quick to point out that we may be due for a correction. Bears suggest equities are overvalued by about 10 percent to 15 percent. The bulls are quick to counter, claiming that stocks might have risen some 26 percent, but that doesn’t mean they are overpriced.
Using the traditional price to earnings (P/E) ratio to arrive at a valuation, companies in the Standard and Poor’s 500 Index have a combined ratio of 15. That’s a bit lower than the average of 16.2 over the past 15 years and significantly better than the 25 P/E ratio of the boom years of the stock markets in the late ’90s and early ’00s. Bulls admit that stocks aren’t cheap, but they believe the fundamentals (company earnings, profits, etc.) support the current market pricing.
The comments above are general in nature, and are not intended to replace the advice of your own tax and investment professional advisor.