March 2021 Newsletter to ClientsSubmitted by Moneywatch Advisors on March 15th, 2021
Enjoy this month’s edition that features a perspective on the stock market plus a reminder to UK clients about the changes in their Fidelity fund options.
Are stocks over-priced? It isn’t difficult to find some breathless stocks commentator warning about a fall in the stock market these days. One must wonder if some of these people really secretly wanted to be TV meteorologists so they could announce the impending snowstorm with gusto! Their apparent joy aside, is the stock market overpriced? After the second straight year of double-digit returns and new record-highs for the S&P 500 Index set several times last year, the question isn’t unreasonable. For some help answering those questions, let’s look at some data.
A popular way to look at stock prices in context is to use what’s called the Price/Earnings ratio. It simply looks at the price of a stock compared to the earnings that company produces each year. A price may be way up but if the earnings are way up too, the stock isn’t any more expensive than before. However, this ratio can be a bit misleading because company earnings can change sharply year to year without altering the overall trajectory of the company. Think unusually low earnings during a pandemic, for instance. So, Robert Shiller, a Yale professor, developed the CAPE Price/Earnings ratio that converts earnings into a 10-year average that also incorporates inflation. This should, at least theoretically, smooth out aberrations like last year and allow for a more useful measurement.
The CAPE ratio of the largest 500 U.S. companies is 35.0 today. Roughly, that means an investor pays $35 per share for $1 per share in company earnings. For perspective, the peak CAPE ratio was 45.8 in March, 2000. The market fell sharply soon after. U.S. stocks are priced much higher than stocks around the world, however.
To add further perspective, stocks are favorably priced when compared to bonds, the primary alternative. That’s because bonds are also highly priced now as prices last year rose as interest rates fell – they move in opposite directions. We don’t invest in bond mutual funds so much to achieve returns as we do to earn income and counter-balance the natural volatility of the stock market.
All of this does not tell us how the stock market will perform in 2021, of course. Short-term price changes measured over months can make seemingly counter-intuitive moves. So, as you know, that’s why we diversify your portfolios and maintain an investment strategy we believe is right for your individual circumstances and long-term needs.
UK fund changes:
As a reminder, UK worked with Fidelity to make some changes to the investment options offered within the UK retirement plans. Please know that there is nothing for you to do at this time.
Moneywatch is currently evaluating the funds that will replace the funds we have been using. For some, the evaluation is simple. For instance, both Fidelity Contrafund (FCNKX) and Fidelity Low-Priced Stock Fund (FLPKX) simply move to different, lower-cost, share classes. For others, such as the small cap funds, we will have to decide if we believe the same level of performance can be achieved with the new funds. If not, UK will provide what’s called a Fidelity Brokerage Link option that we may consider in order for your UK investments to continue to perform the role we need them to within your portfolio.
If you have questions, please let us know. We will be in touch over the next few weeks as we make decisions that are in your best interest.
Thank you for your continuing confidence.