The Standard & Poor's stock index closed Friday 2.3% lower for the week, and is 24.6% off the epidemic low of March 23. Amid the worst economic crisis in modern history, here's what it means to retirement investors based on a historical perspective and facts about earnings, which ultimately is what drives stock prices.
Historically, shares in America's 500 largest publicly traded companies are priced at a multiple of 16 to 19 times their expected profits. That valuation range of stocks in 'normal' times is shown in the two solid red lines. In recent weeks, the S&P 500 has been priced near the high end of the normal valuation range. The actual price of the S&P 500 is the black line.
The dashed red lines apply the historical valuation range, of 16 to 19, to the latest consensus earnings forecast from Wall Street's analysts surveyed by Thomson Reuters IBES. .
The actual earnings of the S&P 500 companies per share in 2019 was $162.97. As of May 4, 2020, the 2020 and 2021 estimated S&P 500 operating earnings per share was $130.90 for 2020 and $168.04 for 2021.
The Coronavirus bear market low of the Standard & Poor's 500 index, to date, was 2237.39 on March 23, 2020. Closing Friday at 2,863.70 Friday, the S&P 500 is priced for the partial shutdown of the economy to continue through the end of 2020 and a sharp recovery in 2021. Even if prices head sideways, volatile spikes and downdrafts are likely in the days ahead.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market-value weighted index with each stock's weight proportionate to its market value. Index returns do not include fees or expenses. Investing involves risk, including the loss of principal, and past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
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Financial planning provided by Williams Advisory Services, LLC, a Registered Investment Adviser.
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