The S&P 500 is currently at all-time highs. As we are in the seventh year of a bull market, it is not difficult to hear the bullish story among the main stream press. Just watch a little CNBC, Bloomberg or the evening news and the market pundits will make you question why you have any market fears at all. Since we are frequently provided the bull case for the stock market, I always maintain a mental checklist of concerns I have about the overall economy and market. Lately, I have noticed my checklist getting a little longer…….
- Economic slowdown in many emerging markets – China & Brazil
- Economic slowdown in Europe
- Price to earnings multiples on the S&P 500 at 10-year highs (3 full points above the 10-year average)
- Potential Greek Exit (“Grexit”) from the Eurozone
- ISIS
- Ukraine/Russia conflict
- Deflationary signals from around the globe
- Downward trending oil and copper prices
- Record low levels on the Baltic Dry Shipping Index
- Downward revenue and earnings per share revisions for the S&P 500 Index for 2015 consensus expectations
- More misses than exceeds on key economic statistics relative to consensus expectations
- Slower reported revenue and earnings growth
- Escalated currency volatility – currency wars?
- Negative Interest Rates in some parts of the world
- Positive stock reaction to clearly negative economic news
Although I could continue, I will stop there. All these concerns and yet the stock market is at a record high and the P/E valuation multiple is at a 10-year high as well. It appears to me risk in the stock market is higher than commonly believed or communicated. Thus, when you listen to the wall-to-wall positive spin on television, just think about some of these potential concerns. Lately, it feels investors are forgetting about the risk element in the risk-reward investment equation. While it is impossible to call an exact market top, it is prudent to be aware of valuations and potential market risks when trading at all-time record high levels on the S&P 500.
At Winch Financial we are constantly evaluating the risk and reward potential in the overall market, asset classes and individual securities, along with the goals and risk tolerance of our clients, to help them reach their investment goals.