As the Dow Jones Industrial average (DIA) breaks through its all-time high and the S&P500 (SPY) is bumping up against the range, investors want to know: Is this an okay time to keep buying?
To make this assessment, an investor needs to do a relative assessment based on where the market is currently trading. In the case of the S&P 500, the most used conventional model is the PE multiple. It is simple in concept. If you have the data, take the current trading value of the index and divide by the current level of earnings of all the companies in the index to get the PE ratio. Then, you can interpret the ratio relative to current expectations for earnings and possibly relative to where the ratio has been in past similar market conditions to judge whether the market is over or undervalued.
But is this a good way to
After the multi-decade long rally in the Treasuries market, yields are now hovering around historic low rates. If you are wary of a potential rising rate environment, short duration and inverse Treasury exchange traded funds could help mitigate the risks in a fixed-income portfolio.
"With interest rates at all-time lows, potential upside in any new fixed income positions is limited. In fact, the risk-return profile for fixed income may be at an extreme. Given the prospect for higher future rates, now may be a good time to consider potential hedges against rising rates," says ETF manager Invesco PowerShares.
When looking at the spectrum of available Treasury bonds, investors may choose from short duration to long duration securities. Since there is a greater possibility that interest rates will rise over the long term, long-term bonds may suffer a discounted market price when sold. Essentially, longer-term bonds are riskier because there is
Treasury yields have ticked higher from the summer low as central bank stimulus has improved sentiment and nudged investors into riskier assets. Bond ETF investors can protect themselves from rising interest rates by moving into funds with shorter durations, while ETFs that short Treasuries are a more aggressive play.
Yields on the 10-year Treasury nearly touched 1.9% earlier this week after bottoming around 1.4% in July. Bond prices and yields move in opposite directions.
"We had seen a huge rally in risk markets up to the end of last week. We seem to have taken a bit of a pause for breath now as the market assesses the impact of ECB and Fed measures," RIA Capital Markets bond strategist Nick Stamenkovic said in a Reuters article.
Nevertheless, Stamenkovic projects yields will hit 2% at the end of the year.
Investors worried about the impact of rising rates can