One of the core philosophies behind Lazy Man and Money is that you can manage your money without a lot of work. Typically, you set up a system once, such as contributing to a 401k plan, and then review it once or twice a year. Combining a good income and a few good systems is enough for most people to achieve financial success.
If you are following this bare minimum philosophy of financial management, this is one of the times I want you to be active. You may not have noticed it, but the stock market has been soaring for a long time now. It soared before the election, and it continued to soar after the election.
A high stock market isn’t necessarily cause for concern. There are many, many times when the stock market just keeps going up and up. Depending on the stock market index, it has reached a new high of 50 days or more this year. Here’s what investing $100 in the S&P 500 in 1980 would be worth according to this website.
Click the image above so that the website opens in a new tab. We’ll refer back to it, and it will be handy to follow along with your mouse on certain dates.
Do you see any point where you’d like to cash out? Sure, there have been little hiccups for a couple of years here and there, but overall, you would have wanted your money in the market for the last 45 years.
Here’s an exercise. Pick a year like 2014, 2017, or 2021. Cover up the chart to the right and just look at what it was doing on the left. In all those years, it was already setting new highs. Then you move your hand away and see that it continued to set even more new highs.
We don’t know if we are in one of those years. Even though the stock market is setting new highs, it might continue to set even more highs.
However, I’m going to present you with another chart. This is the Shiller P/E or CAPE.
Like with the S&P 500 chart, click that image for it to open in a new tab.
This chart measures the price of the stock market relative to the earnings. Earnings are critical because if companies aren’t making money, investors won’t pay a high price for them. Looking at the chart carefully, you see some obvious peaks and valleys. For example:
- 1929
There’s a big peak here. Have you heard about the stock market crash of 1929? That happened in October, but if we had this indicator, some smart people could have seen the PE number at 31 and decided that the stock market’s price was too high for its earnings.
- 1982
I’m jumping ahead to 1982 so we can match it with our S&P 500 chart above. You’ll notice that the Shiller PE was a lowly 6.64. That wasn’t only the cheapest in decades at the time, but the stock market hasn’t gotten cheaper since then. The huge growth in the S&P 500 chart makes sense now.
- 1999
Are you old enough to remember the dot-com bubble?. As Wikipedia describes, “…investments in the NASDAQ composite stock market index rose by 800%, only to fall 78% from its peak by October 2002.” The Shiller PE hit an all-time high of 43 in October of 1999. It would have been reasonable to see it hit 35 and start to diversify away from big tech winners that had gone up so much.
- 2008
Perhaps you remember the Great Recession in 2008? In this case, the Shiller PE of 25 didn’t tell us that stocks were very expensive. However, if you look at the Shiller PE, it sank to 14 in 2009 – the cheapest the stock market has been since the late 1980s. I know it is hard to invest cash that you don’t have because of the recession. However, if you did have money to invest, it was a great time to buy as you’d ride a wave of a bull market up to COVID.
- 2021
Lastly, we have the drop of the Shiller PE in October 2021. It was at 38 and dropped back down to 28. The S&P 500 would drop 21% in early 2022 due to high inflation and the Fed raising rates. We may not have known those were coming. However, we did know that a Shiller PE of 38 was historically high and has led to a crash. The previous times, it was above the 30-35 range.
So what about today?
The S&P 500 is up 26% since the start of the year. There is a lot of optimism that the new administration will lower taxes, decrease regulation, and generally help businesses boost profits. It’s also likely the Federal Reserve will lower interest rates, which pushes people to invest in the stock market for more profits. It should be a great business environment.
However, that Shiller PE is at 38 again. That tells us that the market is historically very expensive. In my opinion, everything is priced for perfection – there is no margin for any negative news.
With the stock market up so much, this is a great time to look at your portfolio and see if your investment allocation is where you want it to be. I see the trend in the Shiller PE and feel like we could have a bear market like the other times it got as high as it is. I’m going to sell off some high growth stocks in my portfolio and buy more bonds and high dividend stocks like consumer staples. These investments usually hold better when there is a crash.
What if the stock market keeps going up? Well, I always stay invested, so I will still make some gains. If you like this article and would like to get future articles delivered directly to your inbox, use the form below to sign-up for free.
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