The Pause that Refreshes | AP Wealth Management

The recent sharp decline in stocks is both long overdue and healthful.  As illustrated in the accompanying exhibit, in January the S&P 500 Stock Index was experiencing its longest ever run without a 5% correction.  While corrections might initially be worrisome, they are generally beneficial as they help alleviate excessive speculation and should help maintain reasonable valuations.

The extraordinarily low interest rates of the last ten years caused financial assets to appreciate to levels that are hard to justify unless corporate earnings grow substantially more than projected.  Furthermore, if interest rates revert to a  more normal level, the present value of future earnings is worth less, so stocks should trade at somewhat lower price/earnings ratios.

Rather than panic, we are relieved that stock markets are presently returning to more rational valuation levels.  We have been hard pressed to put cash to work with the S&P 500 trading at a P/E ratio of 20x.  Its current 17x is still not cheap.  A P/E of 15x is generally perceived to be fair when interest rates are at normal levels.

Be assured that we are closely monitoring the markets, seeking opportunities to find assets that should appreciate in value as our economy continues to grow at a more favorable rate.  We seek both capital appreciation through increasing share price as well as growth in income with dividend growth.

For Further Reading:
WSJ – The Market Points Toward Economic Growth