The S&P 500, also known as the U.S. stock market broke and held 5000 this week. That’s a new all-time high for the most watched (and most invested) stock market index. The most popular version of the index is cap-weighted, meaning the largest stocks by valuation get the greatest weight in the index. The active managers (analysts and fund managers) who price the stocks determine the weight of each stock. For many years that group has favoured growth stocks, dominated by tech companies. And recently the potential of AI (artificial intelligence) to rewire the world has provided another jolt. Index investors are going along for the ride as the S&P 500 cracks 5000.
To set the backdrop here’s a post that describes – What is index investing?
With passive cap-weighted index investing you are essentially buying the market instead of trying to beat the market with individual stock evaluation. You are trusting the evaluation and expertise of thousands of fund managers – the collective guess if you will. Ironically, the group think beats the individuals by a wide margin.
High fees, take off eh!
And here’s the beauty part – you don’t have to pay these experts a penny for their time.
You can buy the U.S. index for about 0.03%. Ya, you might need your glasses to see that miniscule fee. That’s three one hundredths of one percent. Canadian mutual funds typically have a fee of 2.0% or higher. Bob and Doug, to those mutual funds would say – Take off eh! They would also say, don’t get hosed with high-fee Canadian mutual funds.
You’ll pay a little more for Canadian and international index ETFs, but you can certainly put together a global portfolio with fees in the area of 0.10%.
And there’s more good news on the purchasing of ETFs.
It’s a no-brainer for most investors. You can buy the markets super cheap. You can add new monies on a regular schedule – put your wealth creation on auto pilot. It’s super easy. As Bob and Doug say – it ain’t rocket surgery eh!
U.S. stocks crack 5000
The S&P 500 advanced 1.37% for the week to end at 5,026.61 points, posting gains in four out of five sessions.
The index notched its fifth straight weekly gain, and in doing so achieved several new historic milestones. The S&P on Thursday briefly crossed the 5,000 points mark for the first time ever, and then on Friday closed above that level, again for the first time ever.
Some interesting statistics to consider: it took Wall Street’s benchmark index 719 trading days, or nearly three years, to close above 5,000 points from 4,000 points. The gauge had cleared the former mark back on April 1, 2021. This was also the longest stretch between 1,000-point milestones for the S&P 500 since the 1,227 trading days, or nearly five years, it took between its 2,000 and 3,000 points levels. That period was from August 2014 to July 2019.
As I wrote in September, the waiting is the hardest part for investors.
At times investors have to wait. We build and springload the portfolio waiting for the next aggressive move higher. In fact, these holding periods can be beneficial.Dale on Cut The Crap Investing
Things could change in a hurry, but for now investors are being rewarded for their patience.
Is the U.S. market too expensive?
The S&P 500′s forward price-to-earnings ratio — a commonly used metric to value stocks this week rose to 20.4 times. That puts it far above the index’s historic average of 15.7.
“The good news is that valuations, while stretched … are nowhere near the 28x peak at the Y2K Bubble Top,” Julian Emanuel (Chase Investment Counsel) said in a Globe & Mail piece.
The S&P 500′s valuation is skewed by the heavy weighting of the Magnificent Seven group of megacap stocks that have a combined weighting of 29% in the index and trade at an average of 34 times earnings.
History would suggest that the U.S. market delivers modest returns over the next several years or decade. It has to play catch up with the elevated PE ratio. And of course, you don’t have to buy the market if you are concerned about valuations.
“Beyond the behemoths, sectors like Industrials, Consumer Discretionary, Financials, and Materials have seen substantial gains, ranging from 21% to 37%. It’s a broad bull market, with only a few sectors lagging. The narrative? Success isn’t limited to the top-tier stocks,” offered Ed Yardeni of Yardeni research.
That said, the U.S. is where they keep the growth.
Where are the best companies on earth?
This has been my personal bias for quite some time, and was made public from the first day this blog went live …
Canada will also not be heavily involved in any tech and AI revolution.
While we own Apple and Microsoft and other growth stocks, I would not add at outrageous valuations. A recent look at our U.S. stock portfolio revealed we still have a long term beat over the markets. But like most, we underperformed in 2023.
ETF dollars chasing a scarce asset
And it’s nice to see bitcoin recovering and surging after the U.S. bitcoin ETF launch(es).
I had taken some nice profits in my RRSP, but kept a 1%’ish position. I am building in the TFSA instead. That’s a much better place in case bitcoin really does ‘go to the moon’. 😉
My investment thesis is playing out. And of course this is not advice. It will continue to be a very volatile asset.
More Sunday Reads
Earnings season is in full flight so we head over to Dividend Hawk for the weekly wrap. There were many notable Canadian companies that reported this past week. And a stormy week it was with Bell shocking many investors with a very mixed bag and a dividend that is not covered by free cash flow. Forward guidance was not favourable.
Here’s a Tweet summary I shared. You can check out some of the commentary as well.
They will cut costs and restructure. Management and most analysts expect the dividend to be covered in 2025 or 2026. They did increase the dividend by 3.1%.
But there was some better news from Enbridge and Telus picked up Bell in the telco space. With Telus: Revenues up 2.6%, adjusted earnings up 9.4%, free cash flow up 38%.
Dividend Daddy has the goods on Brookfield …
CVS, a return to health?
I was happy to see my CVS report strong numbers. CVS Health is a weak performer for me, but I have added to the position recently. The company is executing on its plan and the numbers are moving in the right direction.
We’ll then head over to Banker on Wheels for the post and podcasts of the week.
At Findependence Hub, Mark Seed looks at the art and math of RRIF withdrawals. For many, there can be a great advantage to accelerating the RRSP and RRIF withdrawal rate. The strategy would allow for the delay of CPP and OAS to benefit from those increased payments. By delaying from age 65 to 71 you’ll receive increased payments of 42%.
Of course there are many moving parts in trying to find the optimal order and rate of portfolio asset harvesting – to create retirement income. There’s only one way to discover the optimal strategy, and that is to run the retirement cash flow software. You can head over to Cashflows & Portfolios and Mark can help you out for a very reasonable fee.
You can also consider an advice-only financial planner.
At Million Dollar Journey, Kyle looks at OAS (Old Age Security) payments – the ultimate guide. You’ll find details on eligibility, clawbacks and payment dates.
For more on Canadian stocks check out Stocktrades for Dan’s take on Canadian banks. The banks will begin reporting earnings in a couple of weeks.
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Have a great Sunday, and week.
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