Some worry the U.S. stock market, like a first time marathoner, a few miles from the finish, may be getting a little wobbly. There is no denying the Standard & Poor’s 500 Index has had a good run. It has gained about 172 percent since its low following the financial crisis, and its earnings have grown by 121 percent since 2008, according to Barron’s. Of course, that growth has been supported by extraordinary measures including very low interest rates and multiple rounds of quantitative easing.
Low interest rates have meant businesses could borrow money relatively cheaply. Barron’s pointed out lower borrowing costs were reflected in bond spreads – the difference between the current yield on one type of bonds (for example, high-yield bonds, investment-grade bonds, or government bonds) and that of other types of bonds with similar maturities. The differences in yield between higher risk and lower risk bonds are a lot smaller than they once were. According to Barron’s, from late 2008 through early 2014, the yield on high-yield bonds and comparable Treasury bonds has narrowed from about 22 percent to about 4 percent.
As private borrowing costs have dropped, companies have been able to borrow billions of dollars and pay relatively little in interest. Some have returned the money to shareholders as dividends; some have used the cash to make acquisitions; and others have repurchased shares on the market or directly from investors. Typically, when companies repurchase stock, their earnings per share rises and so does the value of any outstanding stock. Regardless, low interest rates and cheap borrowing costs have helped fuel share price appreciation and the bull market in stocks.
Three rounds of quantitative easing (the Fed’s bond buying programs) also helped push stocks higher. An expert cited in Barron’s noted “there has been a more than 90 percent correlation between the growth of the central bank’s assets and the S&P 500 since the bull market began five years ago.”
Now, the Fed is tapering quantitative easing and has indicated tighter monetary policy may begin as soon as early next year. Should investors worry the bull market will go away as these exceptional support measures are taken away?
If an investor has long-term financial goals, the answer is no. The portfolio allocation may have been chosen to help pursue those goals through all kinds of market conditions. If the stock market is slowing down, an investor may experience slower growth but that doesn’t mean the goals have changed or the holdings are unsound. We may want to stay focused on the finish line.
Weekly Focus – Think About It
“Humility is not thinking less of yourself, it’s thinking of yourself less.”
–C. S. Lewis, novelist, scholar, broadcaster
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
*The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
* Stock investing involves risk including loss of principal.
http://online.barrons.com/article/SB50001424053111904628504579431230885220564.html (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/03-24-14_Barrons-Stocks_Perform_a_Balancing_Act-Footnote_7.pdf)
http://online.barrons.com/article/SB50001424053111904628504579417220757475770.html#articleTabs_article%3D1 (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/03-24-14_Barrons-Happy_Birthday_Bull-Footnote_8.pdf)