2021: Is the stock market high?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
Since the 2008-9 Financial Crash, stock markets – particularly in the US – have arguably seen their biggest ever “bull run” (upward trajectory). This was interrupted in 2020 as the COVID-19 pandemic hit markets, but equities quickly started to recover and had gained 79% from the lows of March 2020. This begs a number of questions. How do we know that the stock market is “high”, and why is this the case? Can this momentum be sustained?
In this article, our financial planning team at Castlegate here in Grantham, Lincolnshire offers some reflections on these important questions. We hope you find this content helpful. If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
Is the stock market “expensive”?
How do you determine if stocks are, broadly, expensive today in 2021 or selling at a “discount”? Here, a range of valuation measures can be used. One popular method is the Buffett Indicator, which compares the total value of all publicly-traded stocks in a given country to its GDP. Presently, in the US, this is the highest it has been since the 1950s, at 220.8%. Another approach is to compare the price of a stock market to the earnings of stocks. In the US, the historical average “P/E ratio” of the S&P 500 is 19.6. The last 10 years, however, have stood at 39.2 – the highest since the “internet bubble” in 2000.
At this point, it is crucial to note that not all stock markets are “expensive”. The UK, for instance, is widely seen as “undervalued” compared to the US. A range of explanations can be offered for high valuations in certain countries. One reason is that interest rates have been very low since the 2008-9 Financial Crash. This lowers the returns offered from bonds and makes it cheaper for companies to borrow money (which can help them grow faster).
Another reason could be positive overall investor sentiment. The US has not entered another major conflict since the 2003 Iraq War, and growing tech companies (the “FAANG” stocks) have played a huge role in driving the overall stock market upwards. Inflation has also been kept relatively low, although there are signs this is starting to change.
Where from here?
There is an old saying: “what goes up, must come down”. Yet things are rarely so simple with the stock market. Of course, the nature of stock markets is that they “boom” and “bust”. Yet the timing and duration of the latter is never certain. This makes it difficult (impossible, even) to try and “time the market” successfully with a cash lump sum – for instance, waiting for a “crash” before you invest a lump sum, hoping to enjoy the subsequent market recovery.
It is interesting to note that, following the “COVID-19 market crash” in March 2020, markets in both the US and UK have recovered strongly – even throughout many months of lockdown. There are also positive indicators in both economies which could facilitate further stock market growth. First of all, employment remains high despite the economic damage brought about by the pandemic. In the UK, it stood at 75.2% in September 2021 – only 1.3% lower than before COVID-19 swept the country.
Secondly, interest rates remain at historic lows with the US Federal Reserve’s rate at 0.25%, and the Bank of England’s rate still at 0.10%. As mentioned above, this can drive up the stock market valuations as investors look for better returns outside of fixed-income securities. The Bank of England recently voted to hold its rate steady at 0.10%, despite rising inflation (which theoretically is controlled by increasing the rate). Whilst there are rumblings that the base rate could be raised in the months ahead, this is unlikely to rise dramatically due to the instability it would cause – particularly in the stock markets.
Investor sentiment in the UK and US is still overwhelmingly positive. Having said this, there are some headwinds to consider with your financial adviser, to ensure your investment strategy is up-to-date. First of all, inflation is rising and it is important to factor this into your portfolio. It may be that the rise in both the UK and US is transitory (as central banks argue). In which case, your long term strategy might not be affected too much. However, if this turns out to be longer then you may need to update your asset allocation appropriately to ensure that your target returns are protected – whilst reflecting your wider financial goals and risk appetite.
We cannot say, for certain, where inflation and interest rates will go in the coming months and years. The best course of action, therefore, is to check the strength of your portfolio with your financial planner – ensuring it stands the best chance of wealth growth and preservation in a range of different scenarios.
Conclusion & invitation
If you are interested in discussing your own financial plan or protection strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
