The State of the Stock Market

This month marks the six-year anniversary since hitting the bottom of the stock market in March 2009 following the global financial crisis of 2008. Since then, we have had six years of unusually positive U.S. stock market returns. Remember that we invest for "future expected returns" and that "past returns are no guarantee of future performance." Investing is like driving a car: We can't drive by looking only in the rearview mirror; we must scan the horizon through the much bigger and broader windshield.

One measure of U.S. stock market valuation is the cyclically adjusted price-earnings (CAPE) ratio, which was devised by legendary value investors Benjamin Graham and David Dodd in 1934 and was more recently popularized by Yale University professor and Nobel laureate Robert Shiller. CAPE places the U.S. stock market at the high end of historic valuation ranges. Put more simply, the U.S. stock market price is high relative to U.S. corporation earnings, and it is profits that drive prices.

What does this mean? It does not mean that a U.S. stock market crash is imminent, but it does mean that future return expectations should be lower than long-term averages. However, many factors are involved: If U.S. corporate profits grow as the result of a stronger economy, then the U.S. stock market may perform better than CAPE indicates. Stronger employment and wage growth, which have both been elusive factors in the economic recovery, may pleasantly surprise us in the near future.

As always, no one has a crystal ball, and broad diversification is always the best strategy. All of the above information applies to U.S. stocks; therefore, international stocks, which have not risen nearly as much as U.S. stocks have in the last six years, may prove to be good sources of diversification.

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Beware of the Elusive Identity Thief

One final thought: Identity theft continues to grab front-page headlines, especially as we enter income tax filing season. Major corporate data breaches have provided fertile ground for personally identifiable information. The IRS is reporting an increase in the number of fraudulent income tax returns filed whereby an identity thief steals a taxpayer's Social Security number and files an income tax claiming a refund. We urge you to follow the multitude of steps available to help protect your personal information, including careful online password management.

As always, please contact us with any questions, comments or news. You can email me at bruce@bernofinmgt.com or call 513-474-9191. I'm always happy to hear from you!