Session 116–Dow 17,000: Is it too late to buy?

Bill I got this question from a twenty-something, young attorney over the Fourth of July weekend…not dissimilar from many questions that I have received from other investors, young and old, over the past few years. His main concern had to do with market mechanics and the potential for a sharp decline  as a result of a glitch in computerized or high speed trading running amuck– another market meltdown a la the “Flash Crash” or 1987 (Black Monday).  I tried to explain these to be blips, short-term aberrations, doing more psychological than real damage. None-the-less, we are due for something of this nature.  And I would point out that after the run we’ve had this would be predictable and likely.  “When,” would be the question.

People have been asking the “too late” question since the beginning of U.S. stock market recorded history (200 years plus); and based on that history, the answer was always “NO.” This does not mean that there weren’t bad times to buy; but, if you held on, you were rewarded for your fearlessness and patience.

Questioning 30-something with pipe

Questioning 30-something with pipe

A bad time to buy–March 2000, S & P 500 1552.81

The S & P then wound its way to an intraday low or 666.79, March 6, 2009.  This was punctuated by a slightly higher (pre-crash) record close of 1565.17 in 2007.  It was not surprising, about a year ago, I was getting similar questions (July 19, 2013 -S & P 500 record close, 1691.09).   “Would you invest now, even with the market at a new all-time high?”  Our answer in session 49 was “YES.”  This was only 138 points higher than March of 2000 (i.e. less than 10% higher than 13 years earlier).  This Thursday, July 3, 2014, the index closed at a new record, 1985.44… plus 28% in 14 years (almost 3 times the low of 2009).  Interestingly this only represented a whopping 1.75% compounded return over 14 years since 2000.  To be fair you probably would have received an average of 1.67 per year in dividends, bringing the total to 3.27%. This would pale in comparison to the 6.5% to 7% real returns professor Jeremy Siegel asserts the equities produced over the past 200 years (Siegel–“Stocks For The Long Run”).

Here’s the run-down

Date              Close         Earnings*       Multiple*       S & P  yield    10 Year Tsy yld

03/24/00       1552.81       $53.47            29.04               1.16%              6.29%

07/19/13        1691.09       $91.75            18.43                1.90%              2.54%

07/03/14        1985.40     $107.82           18.41               1.89%              2.64%

*Multiple on trailing twelve month earnings

In the simplest terms S & P 500 earnings have more than doubled since March 2000, the dividend has increased 64% and it is now competing with a ten-year U.S. Treasury note that yields 2.64% (down 60% in thirteen years).  The market today is charging only 28% more than 2000 prices (a 1.75% compound  rate of return vs. consumer price index inflation averaging about + 2.5% per year).

As for the caveats, obviously, no tree grows to the sky.  We have had a tremendous run with scant corrections thus far.  There is always that unforeseen event, the bolt from the blue, that can knock the markets for a loop.  We are due for some corrective action.

Having said this, the S&P and Dow at record highs do not equal record valuations vs. the fundamental growth they’ve have seen.  If you have money on the sidelines, you do not need to put it all to work at once, but you should consider getting involved.  You might take twenty-five percent of the amount you wish to put to work and invest that now.  Wait three months (earlier, if the market has a sharp market break) to put another quarter of the funds to work, then another quarter in three months and so on.

Finally, I refer you back to the example a previous post (Session 48).  Investors coming out of the sixteen-year flat market, 1966-1982, asked the same question, Is it too late to buy stocks?”  They had a choice, 15% long-term treasury yields, which was the safe choice, but proved out over time to be the wrong choice.  You really don’t have that fixed income alternative. Last, but not least, this chart of 53 years of S&P 500 earnings and dividend growth is worth a good look, for those wishing to take a bit longer-term view! Please, Forget the noise and look at this!

Stocks on a longer-term basis still look attractive (vs. the alternatives)…It is just not as easy as it was 2, 3, 4 years ago when people were asking, “is it too late to buy?

What do you think?

The information presented in represents my own opinions and does not contain recommendations for any particular investment or securities.  I may,  from time to time, mention certain securities for illustrative purpose, names where I personally hold positions.  These are not meant to be construed as recommendations to BUY or SELL.  All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.  

One Response

  1. Donna
    Donna July 7, 2014 at 12:39 pm | | Reply

    Good article. And Happy Birthday!

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