In our recent blog post on “To Buy or Not to Buy,” we pointed to the dichotomy between today’s U.S. stock market highs and recent headlines predicting a devastating crash. The message was that diversification and knowing your risk tolerance should prevail as the real lessons of the day. But what specific role do stocks play in a diversified portfolio? Why should investors stick with their stocks in an uncertain environment?
First it’s important to keep in mind that the attractiveness of the capital markets is relative. No single asset type is better than the other, but one could certainly be more attractive than another at any given time. A quick look at the other major asset classes, besides stocks, highlights today’s difficult asset-allocation decisions:
- Cash or Money Market Funds. These are still yielding very little, despite several increases in the Federal Funds rate. While we may be due for another increase in the near future, we are still talking about interest rates in the 1% to 1.5% range.
- Bonds. Bonds are a crucial piece of any diversified portfolio. However, the upside in the bond market is limited, with the 10-year U.S. Treasury rate currently at 2.2%. Corporate bonds typically return more than Treasuries; but, given their current prices, corporate bonds are only yielding slightly more.
- Real Estate. A good diversifier over time, real estate has attracted a lot of capital in this low-rate environment. However, many have made the case that most publicly traded real estate investments are also fully valued, limiting the upside potential.
- Commodities. These also add diversity to a portfolio. Price movements can be quite volatile, however, so investors should be careful to limit the amount of exposure in this area.
Getting back to stocks, corporate earnings should drive stock prices over time. Anyone looking for a reason to stay invested in the stock market should take a look at the chart below from Strategas Research Partners. It illustrates the positive trajectory of earnings growth for the S&P 500, accelerating over the past several quarters. While there is no guarantee this trend will continue, for now stocks seem to be a pretty good option, relative to the other asset classes mentioned above.
To be clear, we are not saying there won’t be a selloff or “correction” in the foreseeable future, which history has proven will happen from time to time. What we do believe is what we see — the market has continued to go up in the face of significant headwinds, with some support from corporate earnings growth.
It is impossible to time the market, and, quite frequently, attempts to do so leave investors moving to the sidelines and then back into the market at often the wrong time. This is why we continually encourage investors to have an investment strategy, review it periodically and not make major changes to it simply based on recent market trends.
This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. The opinions expressed do not necessarily reflect those of author and are subject to change without notice. Diversification cannot assure profit or guarantee against loss. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. Sequoia Financial Advisors, LLC makes no representations or warranties with respect to the accuracy, reliability, or utility of information obtained from third-parties. Certain assumptions may have been made by these sources in compiling such information, and changes to assumptions may have material impact on the information presented in these materials. Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment adviser does not imply a certain level of skill or training.