S&P 500: How to invest after the all-time highsContributor J.P. Morgan Investment Trust Team
In afternoon trading on Friday 6th March 2009, the S&P 500 index touched 666 points.
This level, a 57 per cent fall from the start of the crash1, would become the low ebb of the financial crisis for America’s leading share index. A UK investor would have been very brave to buy on this day. The trading session was dominated by the February non-farm payroll report, which reported 651,000 jobs had been lost2. The unemployment rate stood at 8.1 per cent, a level not seen since December 1983. The mood of investors was apprehensive, with the Financial Times front page leading with “Global stock markets tumble – gloom as China fails to deliver fresh stimulus”3.
Not everyone was so dour. Three days earlier President Barack Obama famously proposed investors look past the “day-to-day gyrations of the stock market” and focus on the bigger picture. “Profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal,” President Obama said, “if you’ve got a long-term perspective on it.”
Whatever your political leanings, this proved an astonishing call.
From its nadir at 666 on that fateful Friday, the S&P 500 index would recover and go on a 221 per cent run4 that has yet to run out. It has become passé to report on all-time highs in the S&P index and Dow Jones Industrial Average index because they happen so often. The S&P index, trading at record highs at the time of writing, has broken through 2,300, 2,350, 2,400 and 2,450 this year – significant “round numbers” that some technical investors use to confirm bullish sentiment. The Dow index broke above 20,000 earlier this year and in August recorded nine consecutive higher closing all-time highs.
Does today’s market meet the President’s criteria? It would seem so.
In the second quarter of 2017, companies reported an average 10.1% year-on-year earnings growth, versus analyst expectations of 6.4%, according to FactSet. This result, led by a buoyant energy sector, is the second highest earnings growth rate since the fourth quarter in 20115. As of 31st July 2017, the S&P index trades on a high, though not alarming, forward valuation. The 12-month price-to-earnings ratio is 17.7, while the five-year average is 15.4 and the ten year average 14.06.
However, reading the statements of officials is less comforting. Within a week in June, Federal Reserve Bank of San Francisco’s John Williams said the stock market was running on “fumes” and Federal Reserve Chair Janet Yellen suggested asset prices were “rich”7. Investors are also getting nervous as recent polls and surveys of investors suggest a minority currently believe the market is under or fairly valued.
As a UK investor, reading the news coverage in 2017 can be troubling. When we look at valuation, it teeters from undervalued to overvalued in the court of public and professional opinion. This is despite forward valuations being just ahead of long-term averages. J.P. Morgan Asset Management research shows that whether viewed by price-to-earnings, dividend yield or a range of other valuation ratios, the S&P 500 index is within a reasonable range of valuation norms (see chart)8. We are a long way from 666, and it is fair to ask if we are in the latter stages of the economic cycle, but it is not too late to invest in the US. Indeed, it would be a mistake to exclude exposure to the world’s largest economy from your portfolio.
Timing is key, certainly. Those who bought in 2009 may be pleased with their foresight.
However, J.P. Morgan Asset Management research suggests that only those who stayed invested will have benefitted meaningfully. Did you know that of the ten US bull markets since the 1930s, three returned significantly more than the current run, and two were significantly longer9? In other words, it may be too early to sell, and there may still be opportunities to buy if this rally comes close to replicating either of the periods from 1949-1961 or 1987-2000.
The question turns to ‘what’, not ‘if’, a UK investor should buy to gain US exposure. We believe that a local tends to know the best route. With more than 40 analysts in New York, focussed on fundamental research and first-hand company visits our US presence allows us to find value in the world’s most popular investment market. The JPMorgan American Investment Trust and JPMorgan US Smaller Companies Investment Trust look for well-run companies with attractive and sustainable profits. So, regardless of the current bullish run, our range of trusts and approach to picking high potential opportunities are targeted at giving investors a sustainable edge in up and down markets.