A Close Look At The ‘Wall Of Worry’

November 20, 2014

Will stocks continue to climb the 'wall of worry,' or is the market top near?

This article is part of a regular series of thought leadership pieces from some of the more influential ETF asset managers in the money management industry. Today's article is co-authored by Michael McClary, chief investment officer of Akron, Ohio-based ValMark Advisers, which markets the "TOPS" brand of asset allocation models, and by Robert Leggett, the firm's senior portfolio advisor.

Even as new record highs for the Dow Jones industrial average and the S&P 500 were reached in September and now again in November, a question we frequently hear is, is this a market top.

Indeed, investors have many worries in today's market environment. They're balancing various factors, among them:

Geopolitical tensions, such as terrorism, wars and diseases like Ebola

Erratic economic growth, including the first contraction of gross domestic product (GDP) in the U.S.; two quarters of contraction in Japan; slowing Chinese growth and a possible eurozone recession

Central banks interventions, or lack thereof, including Federal Reserve tightening and potentially inadequate actions by the European Central Bank

Technical pressures, including the fact that it's been three years since the last 10 percent correction reared its head, as well as increased price volatility

And finally, heightened valuations—notably the S&P 500 Index above 16 times forward earnings per share.

The Same Old 'Wall Of Worry'

While many of these concerns are giving investors heartburn, it's important to note that this list largely constitutes the "wall of worry" that stocks have been climbing for the past five years.

We feel bulls have a strong argument to stay in the game, because price-earnings multiples (P/E ratios) being in line with historical averages alone is not a signal of a top. Likewise, our analysis suggests neither volatility nor valuations have reached dangerous levels.

Thus, we hope the bears are once again setting themselves up for disappointment, and, moreover, we favor strategies that are more likely to help you build wealth over time than market timing for quick profits by attempting to call tops or bottoms in trending markets.

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