It’s been a long time since the market has done anything else than just go straight up. During the last 5 years, the S&P 500 Index has gone from 1500 points to 2648 points, almost doubling its value. Savvy investors know that this is abnormal and have set a ton of cash on the sideline, waiting for the great pullback. Historically speaking, investors should expect around 6-8% return from securities, meaning in a 5-year timeframe, the normal return would be 30%, not close to 100%.
On Friday, the S&P 500 Index finally showed sign of rationality and took a 3.6% dive. The main reason behind this is the increase in the 10-year treasury bond which causes high yield stocks to become less attractive comparing to bonds. Naturally, this caused some fluctuations in the market and most securities dropped about 3-5%. On Monday, the same action accord and we could observe a huge selloff in almost every company and no sector was forgotten.
Investors should know that this small correction is totally normal, since bonds now yield more and can compete with stocks as an asset. However, while the VIX index shows sign of fear, souring more than 114% during the last days, the economy is doing well. Companies are making money and increased interest rates are normally a sign of high confidence is the economy. In total, this correction is nothing more than wanted and healthy for the S&P 500 Index.
As with any correction, almost every security take a somewhat dive of random size. Observant investors should look for high quality companies trading at a fair price. Right now, a few companies look attractively priced at the moment. Berkshire Hathaway (NYSE:BRK.B) dropped from $216 and closed at $204 on Monday. Warren Buffett has said that he will most definitely buy the stock if the price to book (P/B) ratio reaches 1.2. As we speak, the P/B ratio is 1.59. During the past 13 years, the highest P/B ratio was 1.90 and the lowest being 0.79. The median is 1.36 so investors might wait a bit before digging in. But, this company is a timeless holding and with Warren Buffet, the greatest investors of all time as the captain, few things could wrong with this conglomerate.
Another company which investors should notice is the famous REIT Realty Income Group (NYSE:O), also called “The Monthly Company”. Realty Income Group is famous for rewarding its shareholders with a sound dividend yield as well as increased fundamental return. Since listing in 1994, the compounded annual total return has been 16.3%. As if that wasn’t enough, the company has had 570 consecutive monthly dividend payments. Right now, the stock trades at the historical 10-year average, meaning that this might be a reasonable time to look closer into this dividend machine.
The author owns stocks in Realty Income Group as a long-term holding.