There it is … the S&P 500 is just 6 points short of record territory, despite the CV-19 pandemic.
I was chatting about the amazing rebound in the market yesterday with an old MegaCorp colleague and we were both astounded that it could jump back so quickly.
He asked what I thought about the stock market right now and what I would do in his situation. He & his wife are just retiring and he shared that about 80% of their portfolio is in cash, since they are between houses – selling one in Minnesota and building another in Florida.
Thankfully, they cashed out of the market before the CV-19 crisis took hold and plunged -35%. “I was feeling pretty smart when that happened,” he said. He resisted buying stocks at a discount when the S&P 500 was at its lowest, although he admitted to sitting on more cash than his real estate needs required.
I shared with him what I have shared here before: the market’s price/earnings ratio continues to be very high. It’s higher now than it was at the start of the pandemic, since corporate earnings have taken such a hit. It was about 25x before the pandemic, but now sits at a lofty 31x.
While the stock market has had a ‘V’ shaped recovery, there may also be some false hope out there on how quickly corporations can recover their profitability. If they can’t deliver what investors expect in Q3 & Q4 this year, I’m guessing a lot of this enthusiasm will collapse.
My advice for him – once he gets his old/new houses settled – is to buy back into the market gradually. It seems to me at this valuation, there is more risk than upside in the short-term. Buying back slowly – perhaps putting 5-10% of his cash into the market over the next 4-6 quarters – might be a nice way to ease back into the market.
What advice would you give someone with so much cash to invest right now?