The continued annual rise of the Dow Jones Industrial Average, S&P 500 Index and NASDAQ highlights the dynamic nature of the U.S. economy. The U.S. market goes from near collapse in 2008 to record highs in 2015.
People are in disbelief about the ascent of the stock market. And, this leads us to the key question: Are we in bubble territory?
When you look at a chart of the S&P 500, you see that the stock market has gone straight up, averaging about 20% annually the last three years.
It’s been a powerful, yet very unusual move higher for the S&P, causing some investment pros and many in the media to cry “stock market bubble.” This implies that something is about to burst.
The sentiment is understandable but the data shows that the stock market has spent the last three years catching-up to where it should be based on economic and earnings fundamentals. The graph below shows the current rise in the S&P against its historical 9.5% average annual return.
We see that the current growth rate of the S&P puts in right back in line with its 9.5% per year trend over the last 25 years, and its long-term returns going back to both 1926 and 1871.
Let’s look at consumer sentiment, which is a measure of irrational exuberance by Main Street?
After being down over the last six years following the 2008 financial crisis, consumer sentiment has normalized. We have to go back more than 30 years to find consumer sentiment as low as it was during the recent crisis.
These data show that things are normalizing. And, the market doesn’t look like a bubble.
Yes, it’s possible that anything could happen tomorrow to change the stock market’s upward trend. But, it’s not because we’re in a stock bubble.
Trying to predict where stocks might be over the next 6 months or year is like trying to guess the final wins and losses of a sports team before the season even begins. Anything can happen. Not even the most thoughtful and well-reasoned sports analyst can do that. Your crystal ball is just as good as theirs.
While we don’t know when the next bear market will begin, it will occur. And, if the last 200 years is an indicator, we know the next bear will be followed by a charging bull market that takes shares to new heights.
To experience long-term investment success, follow one simple principle: stick to a carefully crafted investment plan that takes the emotion out of your investment decisions. Just as a flight from San Francisco to Boston will encounter air turbulence along the way, the financial and investment plans that we recommend always incorporate future market downturns.
Oh by the way, history shows us that maintaining a globally diversified portfolio has rewarded the patient investor handsomely.