In this column published every two weeks, we give you concrete ideas for investing your money.
With its successive records, the year 2024 is not easy for bargain hunters on the stock market. But should we stay on the sidelines anyway?
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The flagship index in the United States, the S&P 500, reached a new all-time high on January 19, more than two years after its previous record. Since then, he has set multiple records, the latest dating back to last week.
In Canada, the S&P/TSX index also reached a new high last week. In March, he shattered his previous record which dates back to March 2022.
For some investors, the reflex is to ask themselves: is the market too expensive? Would it be better to wait for a correction to place your balls?
Go up to better come down?
“It very often happens that when the markets reach new heights, people say ‘it’s sure it’s going to go down’,” relates Luc Girard, portfolio manager affiliated with Desjardins.
Luc Girard
Photo Desjardins
The problem is that the stock markets can also continue to rise…
“If you go out of the market and miss the ten best days in a year, sometimes that’s enough to miss a year’s total return,” says the expert.
Even if they are sometimes spaced a few years apart, historic peaks are not rare events. Since 2020, there have already been around a hundred, according to a recent RBC analysis.
RBC Global Asset Management
Even more interesting, even if someone invested only at historic highs, its performance would not be significantly affected, RBC found.
RBC Global Asset Management
Long droughts
Of course, the markets regularly experience marked falls, as we experienced in 2022. The gloom can even last very a long time.
We forget it, but after the collapse of the American technology sector in 2000, the S&P 500 took more than seven years to reach a new record. And after the financial crisis of 2007-2008, it took more than five years for the index to return to sustainable growth. Countries like France and Japan experienced even longer food shortages (20 years)!
But objectively, is the S&P 500 at a high level when compared to other periods? To find out, we can use the price/earnings ratio, which relates the price of the index to the profits of the 500 companies that make it up.
The value of the S&P 500 is currently about 25 times earnings. This is higher than the 19 times ratio recorded in September 2022, but it remains quite far from the 40 times ratio recorded in January 2021. How will the ratio evolve? This will depend on corporate profits and investor sentiment. Nobody knows exactly.
Canada ahead of the United States?
For what it’s worth, BMO strategist Brian Belski predicts that the S&P/TSX will outperform the S&P 500 by the end of the year with a projected return of 9.5% between June and December for the Canadian index, compared to 5.5% for the American index.
“It’s impossible to hit the timing perfect, so the best way to invest is to do it regularly, points out Mr. Girard. And if psychologically we think the markets are too high, well, we can invest in increments.”
By doing this, we ensure that the cost of our investments decreases with the possible fall of the stock markets. In the meantime, you can invest your cash in safe investments which currently give more than 4% annual return.
In the face of uncertainty, some investors appreciate structured notes offered by Desjardins and banks, which cap potential returns but guarantee the invested capital.
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