Stock prices have advanced significantly over the last few years causing several indexes to reach new all-time highs. This has generated a couple of questions that we have been discussing frequently with clients.
Question: Should you consider selling because the overall market indexes are making new all-time highs?
Answer: We don’t think so. Near the time that I started in this business 1975 the Dow Jones 30 Industrial average was a little above 600…yes you read that right…600 total. Today it’s about 16,500. This index and many others that measure share prices, generally will reflect the profitability of the companies represented by the index and usually company profitability will follow the growth of our general economy. Our economy has grown over the years and continues to grow. The indexes as a reflection of that growth should continue to make new all-time highs. I’ve been witnessing this my entire career and believe that will continue.
Question: Are individual share prices over-valued?
Answer: Our answer here is the same as for the first question…we don’t think so. During the 2008 and 2009 market decline, share prices fell far more than the decline of most earnings. This difference was created from jitters caused by the banking crisis and concern about a possible recession. Some of these concerns came to pass, but as is frequently the case, some investors were willing to sell their shares at prices that simply, (in our opinion) were lower than could be justified by the corresponding drop in profits. By the way, it’s now easy to look back and see that this created an opportunity for investors. Isn’t hind-sight great? We believe the greater than normal increase in share prices over the last few years has simply brought them back to valuations that we would classify as ‘fair’ based on current profitability of businesses.
Thanks for your business and trust,
Past performance does not assure future results. Investors cannot invest directly in the stock market indexes such as the S&P 500. Invest return and principal value of an investment will fluctuate. Investor value, when sold, may be worth more or less than their original cost. The material in this presentation is for illustrative purposes and does not reflect any particular investment.
Comments contained above are meant to be generic in nature and are not meant for specific action.