Charles T. Trible, BridgeTower Media Newswires
Every so often you find yourself in the predicament of replacing a durable good such as a car, a couch or a refrigerator, whether you want to or not. I was recently in this position when I went shopping for a new chair for our living room. I had a set idea of how much I wanted to spend based on the last time I went shopping for one, adjusted for what I assumed inflation would contribute.
Let’s just say I was off by a margin of about 100%. This certainly took me by surprise, despite my wife’s subtle hint—after finding out our expected budget—that we should check a thrift store first. This may not be the case with all durable goods, but there are parallels that can be drawn to investments.
If you were to buy stocks the last time I started acquiring living room furniture, say seven years ago, and maintained ignorance of their prices since, you’d likely find yourself in a situation similar to what I experienced above. In June 2010, the S&P 500 Index had a price-to-earnings ratio of 14.3. Now it sits (or stands in relative terms) at 21.5.
One may naturally then question how much they have to pay for the same amount of earnings. This brings me to my point: According to Bank of America Merrill Lynch, the average investor must work more time than ever to purchase one share of the S&P 500. This means that U.S. large cap equities have gotten more expensive relative to the average person’s paycheck. As you would expect, this is not a particularly good thing. Investors with any inkling of value in their temperament would not want to put money to work at these levels.
What’s worse though, even if they were inclined, the working class finds it much harder to do so. As investors know, markets are made of buyers and sellers of securities. When it becomes more expensive to buy something, those buyers tend to shy away. As the cycle continues, prices can fall and even undershoot true value. This is where the discerning investor steps in again.
As much as I hate to say it, this is the point in the cycle where I will give my living room chair a few more years. It’s just not worth the price to upgrade yet. The same may be said for stocks from the average person’s perspective.
History tells us that this is probably not ideal for equity returns going forward. Couple the current market mechanics with the fact that we are in the second longest bull market since World War II and you may be considering capital preservation as a compliment to your goal of appreciation. Speaking to what is to come, although no one can guess correctly on a consistent basis, if you subscribe to the two ideas above, you may want to consider less well-known investment strategies until equity valuations return to bargain levels. A few of these include option writing funds, well-capitalized preferred securities and/or market neutral funds. To learn more about how these types of strategies can be an important value add to your portfolio in today’s marketplace, contact your investment professional.
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Charles T. Trible, CFA is an Equity Analyst for Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, nonprofits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534, (585) 586-4680.
