It has been nearly five years since the U.S. economy started its recovery after the harrowing experience of the financial crisis.
Long-term investors who had the courage to stick with U.S. stocks have been rewarded — from a price standpoint the S&P 500 has nearly tripled. And the index hasn’t suffered a 10% correction since 2011.
Of course, that’s all in the rearview mirror. The more important question is: Where do we go from here?
Stepping back, the U.S. economy started expanding in June 2009, and the length of the current recovery is above average since World War II, according to The Wall Street Journal. Yet the recovery has been notably weak as unemployment remains elevated and economic growth is relatively subdued.
So far this year, the S&P 500 is up slightly after rallying more than 30% in 2013.
Yet there are signs that investors may want to brace for a potentially bumpier ride as the economic recovery matures. Here are five things investors should keep in mind:
1. The wrong sectors are leading the way: The best-performing sector this year is utilities, which investors often favor when they’re playing defense. Also, investors have been putting money into other sectors of the market that tend to do well in the late stages of an economic recovery, such as energy. At the same time, they have turned away from sectors that tend to do well in the earlier phases, such as consumer discretionary, financials and technology, according J.C. Parets at All Star Charts.
2. Momentum is flagging: Until recently, investors had been bidding up speculative stocks with growth potential, but little or no current profits. Think social media stocks and biotech. “For much of this bull market, total returns have been driven by the low quality companies,” says Sam Stovall, chief equity strategist at S&P Capital IQ. “But when the seas start to get rough, investors will likely prefer those companies that offer a higher quality of earnings and greater stability of price returns.”
3. Some investors are worried that stocks are expensive: Overall stock valuations are a notoriously unreliable tool for trying to predict the market. That said, the cyclically adjusted price-to-earnings ratio (CAPE) developed by economist Robert Shiller is a common valuation metric for the U.S. stock market. The ratio is currently above its long-term average yet still well below the dot-com peak. Stocks don’t seem to be screaming “bubble,” but investors shouldn’t expect 30% returns every year.
4. The Fed is “tapering”: The Federal Reserve under new chief Janet Yellen is slowly but surely scaling back its bond purchases to the tune of about $10 billion a month. In other words, the central bank is reducing its economic stimulus as the recovery matures. That means that investors may focus more on the fundamentals, and less on what the Fed might do to support markets.
5. Seasonal patterns: Mid-term election years traditionally haven’t been great ones for investors. We’re also entering a seasonally weak period for the U.S. stock market — hence the adage “Sell in May and go away.”
DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. All investments involve risk, the amount of which may vary significantly. Past performance is no guarantee of future results.