3 Stock Market Charts That Are Likely to Blow Your Mind
There is plenty of useful news and analysis for investors, but a lot of what you’ll usually find isn’t as informative as good hard data. When you find multiple pieces of data that, combined, tell a clear story about what’s happening in the stock market today, you can gain an important advantage that may help your portfolio.
Today we’ll take a closer look at three graphs showing data that, when combined, tell an important and potentially mind-blowing financial story. If you are investing, you should consider using this information to plan for what’s coming in the market and better manage your portfolio in the long run.
1. S&P 500 Shiller P/E . Ratio
The P/E Ratio It is a common metric that investors use when analyzing stocks because it rates a stock based on its price compared to its earnings in the past year. If a stock’s P/E ratio is too high compared to its peers, this may indicate that the stock is overpriced and investors may want to wait for a price correction before buying.
Some analysts apply the P/E ratio to market indices. Schiller Standard & Poor’s 500 For example, a price-to-earnings ratio can give us an idea of the cost of a stock in general. What distinguishes this ratio is that instead of dividing by one year’s earnings, this ratio divides the price S&P 500 . Index By past inflation-adjusted average earnings 10 years. When this ratio goes up too much, it often coincides with the end of a bull market (i.e. a market correction).
Currently, this ratio is also known as Cyclically Adjusted P/E Ratio, at its highest level since the 2000 dot-com bubble. This data point requires quite a bit more research and it is wise for investors to keep an eye on it. This is not necessarily cause for panic, because there is no evidence that we On the verge of collapse in the market.
There are several reasons why CAPE is so high at the moment. Investors have become very optimistic after the COVID-19 market correction. Stocks have seen stellar performance in the 18 months since, Led stock growth. The rise in valuations was supported by the economic recovery, government stimulus and lower interest rates (more on that later).
High-growth companies also make up more of the S&P 500 index than ever before. The seven largest stocks in this index are all in technology sector, and they constitute more than 25% of the total weight of the index. These companies have higher growth potential than mature giants from other sectors, which usually results in higher valuation rates. This naturally enlarges the head.
2. S&P 500 Dividend Yield
A healthy dividend yield is essential For income investors and retirees. Looking at the average return across the full indexes allows us to evaluate the opportunities available. If returns are too low, investors may have to adjust their cash flow forecasts
The average dividend yield for the S&P 500 generally moves in the opposite direction of the price-to-earnings ratio. Over the past year, the stock has grown more expensive, but the dividend hasn’t lasted. In this particular case, the decline was rather severe, pushing the average return of the index to its lowest point in nearly 20 years.
This chart has some important similarities with the price-to-earnings chart. It provides further evidence that the recent stellar market returns have been Fueled by additional speculation, instead of the basics. The promise of economic recovery and accelerated growth linked to the pandemic is likely to play a role here, but it is undeniable that investors are seeking more optimism and paying a premium.
The average dividend yield is also affected by the shift in sector weighting in the index. Since high-growth technology stocks (many of which don’t pay dividends) make up a larger percentage of the index, dividend stocks have a shrinking weight. This naturally pulls the average return down.
However, many Biggest Dividend Aristocrats It has below average returns at the moment. This is strongly influenced by other macroeconomic factors, and it may take some time for yields to return to historical averages. Investors need to understand this dynamic and plan accordingly, especially retirees and income investors.
3. Corporate Bond Yields
Capital market cash flows and asset valuation are complicated, but there is a great chart that explains some of what’s going on in the charts above. Interest rates are close to historical lows due to major monetary stimulus over the past 15 years. The Federal Reserve responded to economic threats by cutting interest rates. This has lowered bond prices as well.
The chart below shows the average effectiveness Interest rate on corporate bonds Issued by the most creditworthy companies. But why is the bond chart included in the stock market discussion? Well, because current bond yields are exceptionally low, they tend to have a significant impact on other parts of the economy, especially the stock market.
The Fed’s expansionary monetary policy has three related effects that boost stock prices:
- Low interest rates stimulate growth by providing companies with cheap access to capital. This expenditure encourages marketing, product development, new hires, and physical capital. Investors love policies that support growth.
- Low bond yields also encourage investors to inject more capital into the stock market. Debt securities do not provide the same returns at low interest rates, so higher-risk investments do not have the same opportunity cost. This also makes dividend stocks more attractive as an income asset.
- Lower interest rates tend to create more inflation. Business revenue and profits tend to rise along with prices in the economy, and so do stock prices. These make stocks a good hedge for inflation, which causes stocks to rise.
Put all the pieces together
Together, these three charts provide some basis for everything happening in the stock market today. The market bore all-time highs due to interest rates, inflation and recovery expectations. The business fundamentals are good at the moment, but not enough to explain the stock market growth we’ve seen in the past 18 months. As the Fed starts tapering off rates and eventually raises them, this will likely cause some volatility in the stock market.
We may not see a crash, especially if corporate earnings continue to impact as much as they were in the first half of the year. However, we may look at some volatility in the market in the near term. Don’t be surprised and don’t overreact when the swings hit predictably.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of Motley Fool’s premium advisory service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.