Measuring the Market How to Tell What’S Really Happening with Your Investments

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Measuring the Market How to tell what’s really happening with your investments

Market volatility, the daily change to stock and bond prices, is a normal part of investing. On any given day, you can find both optimists and doomsayers. So how does the savvy investor decide whether to feel worried or encouraged? There are any number of sophisticated measures investing experts use to evaluate the stock market, but most relate to one of three fundamental principles: earnings, valuation and sentiment.

What you get for your money: Earnings per share.

Earnings per share (EPS) represents a company’s profitability. Analysts calculate EPS to not only evaluate individual stocks, but also the health of the stock market overall.

Simply done, analysts calculate EPS by taking a company’s net income, or earnings, and dividing it by the number of common shares. To make the estimate more sophisticated, they may also:

Subtract dividends paid on preferred stock (if any).

Use a weighted average number of outstanding common stock shares (to reflect changes over time).

Assume any outstanding stock options, warrants or restricted stock units were exercised, as this would increase the number of outstanding stocks and reduce the earnings per share.

Some investors believe that growth often follows earnings and consider EPS one of the predictors of longer-term investment performance. While EPS has value by itself, the number also plays an additional part in evaluating Retirement Services a stock’s share price or valuation. A LOOK AT THE CURRENT Is it worth it? Valuation. MARKETPLACE There are a number of ways to evaluate the price, or valuation, of a A “bear market” is defined as a stock, but one of the most common is the price to earnings (P/E) 20 percent decline from the all- ratio. The calculation of P/E divides a stock’s per share price by the time high. As of the end of 2018, company’s earnings per share. all three major markets (S&P 500, Small Cap/Russell 2000 and the Nasdaq composite) have entered By itself, P/E simply tells an investor the amount of money he or she bear market territory. The end of a must pay for a dollar of earnings. It can, however, be an indicator of bull market is never pleasant, but, how much the marketplace values a stock and many investors use in the worst hours of every bear P/E ratios as predictors of intermediate-term market performance. market the new bull market is born. For example, the average P/E ratio for stocks in the S&P 500 index is around 15. A higher number may indicate that the market anticipates When we examine the primary a stock will experience significant growth and the price is increasing, drivers of markets — earnings, as a result. A lower number might suggest that the market does not valuations and sentiment — no clear driver for the bear market anticipate growth for the company or that the market is undervaluing emerges. The S&P 500’s earnings the company’s stock. growth appeared to peak around 25 percent at the end of 2018 and Ultimately, a P/E ratio is just a number and it is up to the individual it is anticipated to decelerate to a investor to decide whether a stock is under- or overvalued. This is more normal 10 percent in 2019. where market sentiment can come into play. Market valuations are expected to be 15 times earnings in 2019, which is well within historic norms. The bulls and the bears. Given these factors, negative market sentiment seems to be the Investors’ attitude about the direction stock prices will take is market primary driver of market decline. sentiment. If they feel prices will be going up, they are bullish. More Fortunately, bear markets driven pessimistic investors are bearish. While sentiment is tied to emotions, by sentiment tend to have shorter analysts often try to evaluate it by looking at numeric indicators such lifespans than those driven by earnings or valuation factors. as market trading activity and short-term price volatility; or more speculative measures like investor surveys, social media and news Remember, retirement asset headlines. Because evaluation of market sentiment is so subjective, it allocation requires a long-term can be the most difficult to predict. Sentiment has been known to drive perspective. With the regular stock prices down when every other indicator is positive, and vice versa investing that happens through , but sentiment usually has only a short-term effect on market prices. payroll deductions, retirement savers buy more shares when markets are down and fewer when they are up. Over a long- The importance of strategy. term time horizon, down market investing can actually prove to be There is no perfect algorithm to predict how the market will perform. an opportunity. Because of this, most investors make their investment decisions independently of short-term measures and based on their investment For more information, visit your objectives, time horizon and risk tolerance. They avoid making changes retirement plan provider’s website. to their strategy based on day-to-day fluctuations in price because they realize time in the market tends to outperform timing of the market.

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Disclaimer: The communication is offered solely institutional audiences. It is intended for illustrative purposes and should be viewed only as educational in nature. Investing involves risk including a potential loss of investment. Past performance does not guarantee future results and investment return will fluctuate. Lockton does not and cannot guarantee the future performance or any specific level of performance, the success of any investment or success of any strategy.

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