It doesn’t feel very good, but staying put and taking a beating is sometimes part of investing.
Most loyal readers of my column know I’ve been positive on the global stock market for a few years. So far, that view has worked, as the S&P 500 is up over 90 percent from the March 2009 low.
However, a recent five-week losing streak for the index makes it worth looking more closely at my bullish outlook for stocks. I’ll discuss my current outlook on the market and whether investors should continue to stay the course or shift to the bearish camp.
One of the most difficult times for long-term investors is a market sell-off in which they watch their portfolio values fall from multiyear highs. It doesn’t matter who you are, and it becomes harder to stay the course when the values continue to drop.
Unfortunately in the stock market, and everything else in life, sometimes you have to take a beating before you hit a new high note. Until you realize taking a beating is a normal part of long-term investing, you’ll hurt the overall performance of your portfolio.
One of the reasons I continue to suggest investors stay the course with exposure to equities via stocks and ETFs is the valuation of the U.S. market. The general estimate for 2011 S&P 500 earnings is approximately $96.
Based on a historical average P/E ratio of 15, this puts the index at 1440, or 12 percent higher than Monday’s closing price. What’s even more promising is that estimates for 2012 jump to the ballpark of $107.
Based on such valuations, the market is, at a minimum, a hold.
Historically, when the temperature begins to rise, the stock market often falls. Last year, the market hit a top in April and continued to fall through July before buyers jumped in. Over the next 10 months, the S&P 500 rallied 35 percent.
I’m not saying the exact same pattern is forming this year, but I do believe there could be more potholes ahead for stocks before buyers grasp that there are bargains to be had, and begin to buy in earnest.
The important support zone for the S&P 500 is 1227 to 1250. The top end of the range is less than 3 percent from Monday’s close.
That suggests now is not the time to sell stocks. Rather, now’s the time to begin fine-tuning your buy list.