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A Good Time To Remember How Long-Term Investors Must Think

The Standard & Poor's 500 index dropped a fraction last week, and no major economic data was reported affecting stock prices. The S&P 500 dipped 3.06 points, or 0.1% for the week. Stocks remain not far from their all-time highs, and shares in America's blue-chip stocks are fully-priced by one key measure. Now's a good time to remember how long-term investors must think to increase the likelihood of meeting financial planning and retirement goals.

Stock valuations have climbed sharply from their lows in The Great Recession. While investors were willing to pay only about $12 for each $1 of earnings on the S&P 500 in late 2011, the long economic expansion has restored investor confidence, and the market's price-to-earnings ratio has expanded to about 18.

At that level, stocks are fully-priced — or, arguably, even a bit overpriced. The recent valuation, while a bit rich, is in line with the norm in a low-inflation environment, according to the historical data.

In 2015 and 2016-to-date, stocks have taken a breather following the extraordinary 77%, three-year re-valuation run through the end of 2014.

In that period, the market's price-to-earnings ratio rose from trading at a way undervalued of 12 times 12-month trailing earnings to trading at about 18.2 times earnings as of Friday's close.

A correction could come at any time, but that does not mean it will.

Since January 2015, the S&P 500 has suffered two double-digit declines, and another one could come at any time, and that is the emotional nature of the markets investors in stocks are facing.

Past performance is not a good indicator of your future results, but the long-term view of stock prices above shows how far the market rose from the depths of The Great Recession, as well as the ups and downs in the past six and one-half years.

More volatility is possible.

Still, the economy is expected to strengthen considerably in the last three quarters of 2016, and all of the economic data for many months has been positive. So, even though the stock market is fully-valued and more susceptible to a correction, continued acceleration of the economy is expected. That's what long-term investors must try to keep in mind, above all else.

This article was written by a veteran financial journalist using data compiled by Fritz Meyer, an independent economist. While these are sources we believe to be reliable, this information is not intended to be used as financial advice without consulting a professional about your personal situation. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss.

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