Corporate America is firing on all cylinders, but share prices are high and so are risks.
Bull markets become trickiest to navigate just when they start to look easy. Lately, this one has been a breeze. Investors in U.S. stocks have gotten more than a year’s worth of gains in six months, with Standard & Poor’s 500-stock index returning 12.5% since last November’s election, far ahead of the long-term annual average of 10%.
Moreover, the ride couldn’t have been smoother, with volatility levels at a multi-decade low—that is, until crises at the White House boiled over, with worries over mounting investigations of the Trump campaign sending stocks plunging in a one-day rout on May 17. Expect continued political fallout to result in more speedbumps for the market. But skepticism about stocks is, ironically, usually a good sign, and the economy and corporate profits still seem sound.
It’s not surprising that many Wall Street analysts have raised their year-end targets for the S&P 500 as the index has surged past their previous forecasts–and we’re raising ours, too (more on that below). But we’re raising some yellow flags as well. Returns from here to year-end are likely to be tepid and harder to come by. Stocks could continue to tread water for a while, but the market’s tranquility can’t last forever.
Corrections, typically defined as downturns of between 10% and 20%, occur about every two years. The last one, which shaved 13% off the S&P, ended in February 2016. But pullbacks of 5% to 10% occur every seven months or so, which means we’re overdue. As you look toward the end of 2017, it’s crucial to take stock of your investments—what you need to earn and, yes, what you can stand to lose—and to tweak your portfolio accordingly.