For those of you that are receiving this newsletter for the first time, welcome! I periodically put together a brief newsletter to update you on what is going on in the stock and bond markets and also share some personal finance tips to help you reach your financial goals. In case you haven't heard, the S&P 500 index (a basket of 500 of the largest U.S. companies separated by sectors) has hit a record high. The S&P 500 is a historical index used to gauge the performance of the overall stock market. What has caused this move higher? First of all, Brexit is now being looked at as mainly Europe's problem with little effect on the U.S. economy. There is now talk of other countries other than Britain leaving the European Union (EU) as well. This would likely trigger a recession in parts of Europe and I am not positive that the EU will actually unwind at all like most are fearing. Britain has not yet invoked Article 50 in order to begin the official process to leave the EU. It could turn out that the consequences are too dire to part ways and will stay. The EU would then have time to strengthen the union. I am not an expert, just speculating on what I have read from other sources. In the meantime, the Bank of England said today they are keeping their key interest rate on hold and are hinting at more stimulus measures (think QE) in August. These measures by Europe to ease fears of uncertainty have helped the S&P 500 to rebound 8% since the Brexit low on June 27th. Also helping the U.S. stock market is what's called the Equity Risk Premium. This is a measurement used to determine the attractiveness of stocks compared to bonds. It is measured by taking the earnings yield of the S&P 500 (P/E ratio flipped) which is at 6% and subtracting the yield of the 10-year Treasury Bond which is roughly 1.5%. The equity risk premium is currently 4.5 percentage points, near the highest level in the past 15 years, excluding the '08 financial crisis.
Key Takeaway: Low bond yields make stocks a more attractive investment.
The chart above shows the historical yield of the 10-year treasury bond. It's hard to believe the U.S. government was paying investors more than 10% for 10 year bonds in the '80's, huh? In addition to the equity risk premium being higher than average, the S&P 500 dividend yield is currently 2.17%.
Let's also examine the S&P 500's P/E ratio to see if stocks are historically "overvalued". The price/earnings ratio (P/E) measures the current price of a stock (or index in this case) relative to its trailing 12-month earnings per share. The current P/E of the S&P 500 is roughly 20 times. The average P/E since 1979 is 17.46 times. From a historical standpoint, the S&P is currently overvalued. That doesn't mean the S&P 500 can't move higher. As I have pointed out before, market timing is a losers game because no one knows what the stock market will do from day to day. If you sell today, when do you buy back? You could miss out on even higher returns if investors continue to take money out of cash and bonds and invest into stocks. Plus, the money-making, cash-flush blue chip stocks that make up the S&P are paying investors attractive dividends to stick around for potential long-term growth.
What about bonds? Is it worth investing in bonds with yields this low? The answer is yes due to their safety. Worldwide, interest rates are approaching 0% and some countries even have negative interest rates. The safety and higher yield of U.S. Treasury bonds is very appealing to foreign investors which means the yield could drop even further, increasing the price of the bonds.
This leads me back to the most important key to investing success, diversification. It is extremely important that your investment portfolio includes various asset classes (large, mid, small company stocks, U.S. treasury bonds, investment grade bonds, high yield bonds, energy, REITS, etc.) that match your risk tolerance and periodically rebalance those allocations.
Everyone knows how important it is to budget, but also how hard it is to first keep track of and then stick with it. My wife, Mehegan, and I have been using a website called Mint.com since we first started dating over 4 years ago. Mint was created by Intuit, Inc., the creators of QuickBooks and TurboTax so I feel confident that my information is secure.
When you sign up, you enter in all of your login and passwords for your banking, investment, and loan accounts. It also keeps tract of changes in your homes value via Zillow. It then tracks your account balances and categorizes your spending into categories like mortgage, utilities, restaurants, etc.
Once we tracked our spending for a few months, we then created a budgeted amount for each category and Mint alerts us when we overspend. No one is perfect and perfect is not fun, but this free tool helps us to be aware of our spending and savings goals.
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We encourage you to take note of our business model and compare it to that of your current advisor. Copley Investment Management adheres to the fiduciary standard of conduct. We implement this standard in a number of important ways. First, we use cost efficient Exchange Traded Funds (ETFs) in all our retirement plans. In addition, we do not take commissions on any products we use. Because we are fee-based, we are not conflicted with production quotas that emphasize use of expensive mutual funds that are not in the best interest of the client. Finally, our fee is totally transparent. Our clients take comfort in knowing they are not paying any hidden fees.
I hope you enjoyed this issue of the CIM newsletter. If you found this newsletter valuable, please share with friends and family. As always, feel free to contact me with any questions and topics of interest for future newsletters. Thank you for reading.
Justin Burgess Investment Advisor
Copley Investment Management
5025 B Wrightsville Ave
Wilmington, NC 28409
CIM's goal is to provide quality financial advice at an economical cost. Whether investing for retirement or the next generation, you can rest assured that we are paying attention. Our professional credentials, independence, experience, integrity, and transparent business model qualify us to accomplish this goal.