That said, the statistical data shows that investors can significantly reduce the probabilities of suffering big losses when managing portfolio risk based on a combination of price momentum and earnings trends. Trying to assess how investor emotions, and hence valuation ratios, will evolve is remarkably hard to do. When investors are optimistic, they tend to pay elevated prices for each dollar in earnings, and when they are pessimistic, they hesitate to buy even when valuations (for example, the price to earnings ratio) are comparatively low. Investor sentiment plays a key role in the relationship between price and earnings. Sometimes price changes anticipate the fluctuations in earnings and sometimes earnings lead SPY in one direction or the other. Price and fundamentals tend to move in the same direction over time, and we can see in the chart below that SPY and earnings per share for companies in the S&P 500 are highly correlated.īut the relationship between price and earnings is not very straightforward. Nevertheless, the lion's share of returns (either positive or negative) is going to come from price fluctuations. This is not particularly attractive by historical standards, but we also need to keep in mind that interest rates all over the world are at historical lows. When you invest in SPY, you basically know that you are getting a dividend yield of around 1.9% at current prices. In simple terms, the return on an investment will depend on two key variables, dividend yield and price fluctuations. However, indicators based on price and earnings trends can be remarkably effective in terms of evaluating the market environment to reduce the risk of large capital losses.īased on the currently available data, the market environment still looks healthy, and the most probable scenario is that SPY is going through a short-term correction or a sideways consolidation as opposed to a deep bear market. Market fluctuations cannot be predicted with certainty. In this context, it makes sense to wonder if the ETF is in a short-term correction or in the initial phases or a much more serious bear market. The trade war fears are producing lots of volatility recently, and the SPDR S&P 500 ( NYSEARCA: SPY) remains stuck below its highs from September of 2018.
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