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THE S&P 500’S RETURN so far in 2022, when compared to the same year-to-date stretch for previous years, ranks as the fourth worst since 1928. One result: Stocks look quite cheap. The market’s price-to-earnings (P/E) multiple has retreated as share prices have fallen while corporate earnings have continued to grow.
One chart in particular caught my eye last week. Each month, I peruse J.P. Morgan Asset Management’s Guide to the Markets. There was a graph that split the S&P 500 into its top 10 holdings and the index’s remaining 490 components. The P/E ratio for the top 10 is 24.7 and just 14.6 for the rest. Most of the S&P 500 is now priced below its historical average valuation.
It’s a reminder that, after a summer of volatility, it’s a great time to put money to work in stocks. Year-end is approaching, so it’s important to top off your 401(k) and make your full annual IRA contribution. If you can’t hit the $20,500 annual 401(k) cap ($27,000 for those age 50 and older), be sure to contribute at least enough to capture your employer’s full match.
Also don’t forget to invest money in your health savings account (HSA). While many people leave their HSA sitting in cash and then use it for routine health-related expenses, a smarter move is to invest in low-cost index funds. Use your checking account to cover today’s health care costs and leave your HSA to compound. Money in an HSA grows tax-deferred and can be withdrawn tax-free at any time for qualifying expenses. Just be sure to save your medical receipts, which you can then use years later to shelter your HSA withdrawals from taxes.
What if you’ve been neglecting your 2022 retirement account contributions? You’ve lucked out. How so? Thanks to the stock market swoon of recent weeks, today’s prices aren’t much above their mid-June lows.
PEs may be down cuz of P but I’m worried about E falling next.
Thanks for the article. I certainly agree with maximizing 401k contributions (to catch all employer matches), fully funding an HSA (when available), and paying medical expenses out of pocket and holding HSA funds for long term growth. For long term investors, a consistent plan of doing so makes a lot of sense without any need to consider or debate whether the market is “cheap” or not.
I never try to time market. I know Jonathan C. suggests that if you change your investment allocation based on actual changes in the market levels that isn’t timing the market, but it still seems like you are suggesting that future returns will be positive and better than the recent past. It is true that it usually works that way, but there are no guarantees. If you lived through the 70’s, you know that the market can perform quite poorly for an extended period of time. However, I’m not predicting the future direction of the market in any way. This post could be right or not. We just don’t know. I prefer Bogle’s mantra of ‘staying the course.’ Pick an allocation that makes sense for you and stick with it through rebalancing.
Are stocks cheap? Many utilities are still trading at 20-22 times earnings, despite the rise of interest rates. The market is down, yes, but it has not been beaten into submission yet. Bottoms are typically 10-12 times earnings, as everyone gives up entirely on stocks.
Small caps and foreign stocks are in the 10x-12x range already.