What a remarkable 2020/21 it’s been for shares. Last year started well, with prices rising until mid-February. But as Covid-19 went global, stocks plunged worldwide. However, they have staged a powerful comeback since spring 2020, with another strong surge since Halloween. Indeed, the US S&P 500 index has doubled and more from its 2020 low. But with stocks skyrocketing over 17 months, should I worry about the next crash?
The S&P 500 soars, then crashes
Before coronavirus struck, US stocks in particular were doing rather well. On 31 December 2018, the S&P 500 closed at 2,506.85, following a sharp slump in tech stocks earlier that month. The main US market index had an outstanding 2019, rising almost 725 points — nearly three-tenths (+28.9%) — to end the year at 3,230.78. Before the Covid-19 crash, the index hit a closing high of 3,386.15 on 19 February 2020, having reached 3,393.52 earlier that day.
But as Covid-19 spread globally, infection rates, hospitalisations, and deaths started to soar. Hence, investors panicked. They rushed to sell risky securities (stocks and shares) to buy ultra-safe assets (government bonds). With everyone rushing to the exits at once, share prices plunged. On ‘Meltdown Monday’ (23 March 2020), the S&P 500 hit an intra-day low of 2,191.86, before recovering slightly to close at 2,237.40. Yikes.
US stocks rise again
Thankfully, Meltdown Monday marked the S&P 500’s low point. Over the next seven months, the index rebounded, closing at 3,269.96 on 30 October. That’s a hefty gain of almost 1,080 points — almost half (+49.2%) — since its March low. But then came ‘Vaccine Monday’ (9 November 2020) when news emerged of highly effective vaccines against Covid-19. This news was a shot in the arm for stock prices. Indeed, the S&P 500 has hit dozens of record highs in 2021, reaching an all-time high of 4,440.82 points last Friday. At Friday’s close, the index was up almost 2,245 points — more than doubling (+102.4%) — from its 23 March 2020 nadir.
Fortunately, the doubling of the S&P 500 since March 2020 has boosted my family portfolio by more than any other event in 35 years of investing. As a result, my wife and I could retire today, living comfortably by drawing down, say, 3% to 4% of our asset wealth each year. But we continue to work, earn, and invest our money for a brighter future. Even so, this sustained recovery in US stocks makes me nervous today.
Have stock prices gone too far?
Investment guru and mega-billionaire Warren Buffett cautions investors, “Be fearful when others are greedy, and greedy when others are fearful.” Last March, my family was greedy, putting all our cash into shares during the spring lows. Today, with prices riding high, I’m feeling fairly fearful and not at all greedy. When I look at US stocks today, I see a whole lot of hope baked into today’s valuations. But, though the global economy is recovering, we haven’t beaten coronavirus just yet. Of course, more bad news might trigger yet another slide.
Today, the S&P 500 trades on a forward price-to-earnings ratio of 22.4, an earnings yield below 4.5%, and a dividend yield of 1.3% a year. These numbers really don’t look very attractive to me. However, TINA (There Is No Alternative) tells me that my money will simply stagnate in cash or low-yielding bonds. Hence, my strategy in recent months has been to buy cheap UK shares, especially value and dividend shares in the FTSE 100 index. To me, these are cheap in historical terms, so I’ll keep buying them for now!