Valuing the S&P 500

Valuing the S&P 500

Four years after the S&P 500’s market bottom, the index is hitting new all-time highs and producing a mix of investor optimism and anxiety. Pessimists note that while unemployment remains stubbornly high, federal debt levels continue to climb, and earnings growth is sluggish. But equally as important is the market’s nearly 140 percent climb from its lows, and at four years of age, this bull market is mature.

What do the facts say? Most measures say the market is much less expensive today than it was the last two times we were at this level, according to “The RIC Report” in April by BofA Merrill Lynch Global Research. In March 2000 and October 2007 when the S&P 500 hit similar peaks, the price-to-book ratio (a ratio used to compare a stock’s market value to its book value) was 5.4 and 3.0, respectively, while today it is at a mere 2.4. With much higher corporate earnings today, these and other measures all point to a market that remains inexpensive despite the media’s hysteria surrounding every up or down.

The last two trips to this price level have conditioned investors to expect a bad ending; this visit could likely produce a positive surprise. Consult with your financial advisor to learn how you can best incorporate these findings into your own personal financial goals.

Investing involves risk. There is always the potential of losing money when you invest in securities. Past Performance is no guarantee of future results.

David Menashe is a Senior Vice President and Wealth Management Advisor, and Bruce Morley is a First Vice President and Wealth Management Advisor, for Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer, Member SIPC,and a wholly owned subsidiary of Bank of America Corporation. Investment products are not FDIC insured, are not bank guaranteed, may lose value. (858.381.8113)

Photo by Andy Templeton