The market continues to grind higher with this past week bringing record highs for both the Dow Jones and S&P 500 Index. Additionally the NASDAQ closed at its highest level in nearly 15 years. As we near the end of 4th quarter earnings season, the overall tone of the reports continues to improve with growth on the S&P 500 coming in around 3.5%. In terms of valuations, we continue to see PE multiple expansion as the forward P/E ratio for the S&P 500 is now at 17.1, above 10 and 15 year averages. We would argue that given the low inflation, low interest rate environment coupled with a lack of investment alternatives, that this P/E multiple is justified. That being said, it will be critically important that earnings growth remains strong in order to support these stock price levels.
On Friday, the Eurozone approved a four month extension on Greece’s bailout. While this extension fell short of the six months Greece had requested it did provide some relief to the market by removing immediate concerns over a potential exit from Europe’s currency union.
In the short term, we believe markets can push higher following the positive earnings growth and accommodative monetary policies around the globe. We also support gradually increasing international portfolio allocations from underweight to a more neutral stance as valuations in foreign markets are beginning to get more attractive. Volatility will likely pick up later this year and we would remind investors that there is a decent chance we will see a 5-10% correction in the next 12 months. For those with income needs, we are in favor of raising cash at the current level of the market to avoid having to liquidate securities at an inopportune time. Additionally, we believe selective stock picking will become much more important later this year, so don’t abandon those actively managed strategies in favor of pure indexing just yet.