Stocks are unloved and unappreciated, but are they undervalued?

Unwaveringly, we’ve stressed that investors should continue to look past the negative headlines of the day and instead focus on the underlying fundamentals of the economy. These headlines warn of bond bubbles, rising interest rates, chaos in the White House, dithering on the Hill, overpriced stocks, the threat of nuclear war, building a Wall and trade wars, etc. During the prior administration, the stock market shrugged off much worse than this on its way to a nine-year bull market.

While each negative headline has some merit on the surface, the headline itself looks past the one investment theme that matters the most – at least for now – TINA (There is no alternative), which has buoyed the economy and the stock market since 2009, and is still very much at work influencing investors’ stock-bond allocation.

For the last 96 months, U.S. GDP growth has achieved a steady average yearly pace of 2.1%1 with 2nd quarter growth estimated at 2.7% according to GDPNow. The stock market continues to register record highs with unemployment falling to 4.3% this past quarter2, strong housing, and high consumer confidence.

The Federal Reserve echoed their sentiment of confidence in the economy at their June FOMC meeting via another rate hike and plans to wind down their balance sheet as early as September or October3. We view this as a positive.

Investors have been rewarded through June 30 for their patience as the S&P 500 gained 8.24% and the NASDAQ gained 14.07%, while the Barclays Aggregate Bond Index gained 2.27%4 despite two interest rate hikes by the Fed this year3. Moreover, those who stuck with our advice and diversified, benefited handsomely as non-U.S. and emerging market equities posted gains of 13.81% and 18.43% respectively4. These markets are making a strong comeback bolstered by an improving economic outlook, comparatively lower valuations, and higher dividend yields. The MSCI ACWI ex USA Index has underperformed the S&P by 150%1 since 2009, suggesting more upside ahead.

At a P/E (price to earnings) ratio of 17x earnings, the S&P 500 is priced slightly above its long run average but “fairly” valued and with more upside, so long as investors continue to doubt the Fed, the market, Congress, our global neighbors, and the economy. When that’s no longer the case, we’ll turn our attention to managing risk during the next bear market.

Sources: 1 JP Morgan 3Q Market Insight, Page 18, 42, 2 Bureau of Labor Statistics, 3 federalreserve.gov, 4 JP Morgan Weekly Market Recap, July 3
About the Author

W. Kirk Taylor, CFP®

W. Kirk Taylor, CFP®

W. Kirk Taylor, CFP® is Chief Investment Officer at 1st Portfolio Wealth Advisors. He has been advising individuals, business owners, and affluent families about complex investment and financial planning topics since 1988. He writes and blogs frequently about timely investment and financial topics and is the former host of The Investment Challenge radio program broadcast in the Washington, D.C. metro area on Business Radio AM 570/1260.