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As a financial adviser, I’ve spent the better part of the last few decades reading and listening to financial journalism. In that time, I’ve learned that there are generally two outlooks regarding the market.
When the equity market reaches a point of decline that causes most investors to be alarmed, financial journalism provides a resounding answer: don’t buy! Regardless of the situation, the journalism always notes that it can get worse.
But when the market rallies, journalism provides the same answer: don’t buy! Journalists caution investors, saying that stocks are overpriced and the market is too high – it can only result in a crash.
So, according to financial journalism, there’s never a good time to buy stocks. I find this odd, considering that mainstream equities have compounded at an average of 10.26% annually since the mid-twentieth century.1 One would think that, sometime in the last several decades, there would have been a time when “don’t buy!” was not good advice.
After watching an interview on a financial news outlet, I was prompted to write this reflection. A man with very impressive credentials asserted that the market, valued at the time at 4,770 on the S&P 500, was overvalued.2
The interviewer was primarily interested in where investors should put their money while they wait for the stock market to stop being overvalued. As I listened, I thought there were two questions that might have been more helpful to ask: How is overvaluation being defined? Is valuation an effective market timing tool?
I can’t deny that the S&P 500’s price to earnings ratio (P/E) is higher than its historic average.3 More precisely, the consensus earnings estimate for 2024 is $245, with a P/E of 19.5.4 The 10-year average P/E for the S&P 500 is 16.9.5
And yet, the current P/E is not groundbreaking! It’s certainly not unprecedented. In March 2000, the P/E was 24.4, and in February 2020, the P/E was 19.0.6 The current 19.5 is above average, but it’s not extraordinary.
My other question – the more important question, in my opinion – is whether valuation is an effective market timing tool. Based on the overwhelming evidence I’ve seen, it is not. Then again, neither is anything else.
The ultimate fact of the matter is that the market cannot be consistently timed, just as it cannot be consistently forecast.
The most important contributing factor to an individual’s long-term equity investing success is compounding. In the words of Charles Munger, “The first rule of compounding is never to interrupt it unnecessarily.”
If you have any questions or concerns about your financial plan or the equity market, please do not hesitate to reach out. We have a wonderful team of financial planners here at GDS Wealth Management, and we would be happy to answer any questions you might have. Feel free to contact us at (469) 212-8072 or visit our website at www.gdswealth.com.
1 Investopedia, January 2024.
2 Morningstar, December 2023.
3 Ibid.
4 FactSet Insight, January 2024.
5 FactSet Insight, May 2022.
6 FactSet Insight, February 2020.
Investing carries inherent risks, including market volatility, potential loss of capital, and uncertainty in returns, which investors should carefully consider before making any financial decisions. GDS Wealth Management is an investment adviser in Flower Mound, TX. GDS Wealth Management is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. GDS Wealth Management only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of GDS Wealth Management's current written disclosure brochure filed with the SEC, which discusses, among other things, GDS Wealth Management’s business practices, services, and fees, is available through the SEC's website at: adviserinfo.sec.gov.
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