Tornadoes, Hurricanes and the Stock Market
About the author: Chris Abts is the President & founder of Cornerstone based in Reno, NV. He helps people to better manage their wealth so they can focus more of their time on what truly brings meaning and fulfillment to their life. Abts is also a best-selling author and TV show host of Redefining Retirement, which airs every Sunday evening at 5:30pm on KTVN Channel 2.
What is the difference between a tornado and a hurricane?
First, a tornado is unexpected. It could be a beautiful day and a few minutes later a storm rolls in, and a tornado is on top of you.
On the other hand, a hurricane is different. It’s expected. We can track it thousands of miles out at sea, we know how wide the eye is, we know how fast the winds are, and we know where it is going. We even give it a name. We all have seen the meteorologists on TV, standing in the pouring rain with 80mph winds saying, “In just five hours the eye of the hurricane is going to hit right here!”
And then of course, the next day you see footage of all the people who either couldn’t escape the hurricane due to education and resources, or they made a conscious decision to “ride it out.” All those people then being rescued from their roof tops, wrapped in a Red Cross blanket.
The point is this. A tornado is unpredictable, but we can see a hurricane coming. I feel the same way about the stock market right now. So here are three facts about the current stock market:
March 2017 marked the 8 year anniversary of the current bull market. During that time (January 1, 2009 – December 31, 2016) the S&P 500 averaged a 14.93% annual return. Have you come to accept this as “how it should be” and become complacent?
The Shiller PE ratio right now is 29. If you are not familiar with this, it’s the cyclical price to earnings ratio (P/E ratio) for the S&P 500. And historically that ratio has been closer to 16. Again, right now, it’s at 29. To put this into perspective, over the past 147 years, PE ratios have only been this high three times: 1929, 2000 and today.
The 10 year treasury interest rate is 2.20% today. Over the same 147 year history we have experienced rates this low 16 times. So this interest rate environment isn’t unprecedented. But what is unprecedented is that we have never had both of these two things happen at the same time. We’ve never seen stock valuations this high with interest rates this low. Every other time in history one was there to balance out the other.
So what does this mean for you? I’m not suggesting that we have reached the peak of this market, because no one knows. I’m also not saying you should take all your money and move to cash, as that’s unwise too. What I am recommending is that if you are retired, or getting closer to retirement, it would be wise to reassess your current risk exposure and make sure it is in-line with your risk comfort level. Simply put, review your financial plans and goals and take steps today to make sure the next financial tornado or hurricane will not derail your retirement dreams. To get a better understanding of how to do this, here’s a link to an episode of my TV Program, Redefining Retirement, titled "What Impact Will The Next Market Correction Have On My Portfolio."