04/2020 KIPLINGER’S PERSONAL FINANCE 31power and whittles the
value of financial assets.
In the early 1970s, when
the oil crisis shot energy
prices sky-high, the prices
consumers paid for goods
soared by double-digit
percentages, fueling a bear-
market loss of 48.2% in the
S&P 500 between January
1973 and October 1974.
Back then, the Federal
Reserve hiked short-term
interest rates in an attempt
to tame inf lation. But high
rates also drive investors
out of stocks and into
higher-yielding fixed in-
come investments that offer
juicy returns with far less
volatility than stocks. From
late 1980 through mid 1982,
with the Fed’s benchmark
short-term interest rate at
one time eclipsing 20%, the
S&P 500 fell by 27.1%.➜ To d a y : Inf lation can’t
seem to gain ground.
Growth in the Consumer
Price Index, a measure of
consumer buying power,
has hovered around a 2%
rate since 2016. Kiplinger
expects prices to rise at
that rate in 2020, down
from 2.3% in 2019. A sharp
acceleration in the inf lation
rate, even to 3%, could force
the Fed to bump up interest
rates and should put inves-
tors on notice, says Doug
Ramsey, chief investment
officer at investment firm
The Leuthold Group. Kip-
linger expects the Fed to
stand pat on rates for now,
following a series of hikes
in 2018 and three subse-
quent cuts in 2019.GLOBAL SHOCKS
Events that roil citizens
have been known to roil
markets as well. Investor
anxiety over U.S. Cold War
provocations in Cuba was at
least partly responsible for
the “Kennedy slide” in the
stock market between late
1961 and early 1962, which
saw the S&P 500 decline
28%. And much of the 19.9%
broad market decline (prac-
tically a bear) in 1990 cameshortly after President Bush
said that Iraq’s invasion of
Kuwait “cannot stand.”➜ To d a y : Saber-rattling has
dinged the market here and
there in recent years, though
the dip this past January
following the U.S. strike
on a prominent Iranian
military leader barely regis-
tered: Stocks fell by only
0.7% and recovered in a
week. In fact, the shocks
from military provocations
tend to be short-lived, says
Stovall. Following 21 such
events, going back to the
attack on Pearl Harbor, the
market has bounced back
fully within 45 calendar
days, on average.
A more pressing concern
is the coronavirus outbreak,
which has claimed thou-
sands of lives and thrown
a wrench into the Chinese
economy and businesses
that operate there. If it
reaches the level of a global
pandemic, the resulting
slowdowns in production
and consumer demand
could cripple global eco-
nomic growth, says Mike
Ryan, investing chief at fi-
nancial services firm UBS.
But if it plays out the way
recent outbreaks have, the
market won’t stay under the
weather for long. In the 30
days following the first U.S.
case in each major outbreak
since 2003, the S&P 500 has
posted positive returns, ac-
cording to CFRA.OVERVALUATION
Stocks trading expensively
relative to corporate mea-
sures such as earnings, sales
or cash f low tend to revert
to their historical mean.
That isn’t to say that stockstrading at high prices are
imminently headed for a
bear market, but the more
inf lated a bubble gets, the
more likely it is to pop. By
the turn of the millennium,
for example, investors had
bid the prices of technology
stocks through the roof. In
March 2000, the median
tech stock in the S&P 500
traded at 79 times earnings
over the previous 12 months,
and many prominent online
firms sported no earnings
at all. When the firms failed
to live up to their phony
fundamentals, the tech sec-
tor crashed, dragging the
broad market along with it
to the tune of a 49% loss.➜ To d a y : By many measures,
stocks are expensive. Stocks
in the S&P 500 trade at just
over 18 times estimated year-
ahead earnings, compared
with an average multiple of
16.7 over the past five years
and nearly 15 over the past
decade. Large-company
tech stocks are once again
leading the charge, trading
at a premium P/E of 22, on
average. But that doesn’t
come close to the strato-
spheric levels seen in the
last tech wreck, and the
likes of Apple and Microsoft
are established firms with a
track record of profitability.
Investors should put valu-
ations in economic context,
says UBS’s Ryan. At the cur-
rently low levels of inf lation
and unemployment, Ryan
would expect stocks to
trade between 18 and 22
times year-ahead earnings.
“We don’t think the market
is cheap, but it’s definitely
not overvalued,” he says. Q
CONTACT THE AUTHOR AT RYAN_ERMEY@
KIPLINGER.COM.