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He S&P 500 It's been all over the store in December. It got off to a good start, reaching a record intraday high of 6,099, but has since retreated almost 4% to 5,867.
Meanwhile, the Dow Jones Industrial Averagewhich tracks 30 blue-chip companies, recently ended a 10-day losing streak. That was the index's longest winless streak in 50 years!
What is happening here? Let's take a look.
The market hates uncertainty
On December 18, the three US indices (including high-tech) Nasdaq) recorded their biggest declines in Yonks. This came after the Federal Reserve cut interest rates by 25 basis points.
But surely that was a good thing? Well, not when the forward market didn't like Fed Chair Jerome Powell's statement that he expects to cut rates twice in 2025, instead of four times as initially thought.
Investors have begun to worry about inflation. It is slowly returning there (and here in the UK), and some fear that Donald Trump's proposed tariffs could fan the flames. Rates can now stay higher for longer.
The volatility is likely being exacerbated by the very rich valuation of the S&P 500. Right now, it trades on a price-to-earnings (P/E) multiple of around 25. That's well above its long-term average of 18. .
Remove
As a long-term dumb investor, I think it's helpful to walk away rather than worry about daily market fluctuations.
Over the last decade, the S&P 500 is up about 200%, including dividends. That translates to an incredible compound annual growth rate (CAGR) of 11.6%.
In other words, £10,000 invested back then would be worth £30,000 now (excluding currency movements).
The S&P 500 achieved this despite the first global pandemic in a century, multiple wars, high inflation, and geopolitical tension between the two global superpowers (the United States and China).
No one can say that the next decade will be as fruitful as the last. But the global stock market (dominated by S&P 500 companies) has proven incredibly resilient in the past, and I expect that to continue in the future.
The UK offers great value
Still, investors worried about pouring fresh money into the expensive S&P 500 might want to consider FTSE 100 actions instead. They are collectively trading at a much lower P/E ratio of 15.
One UK action that I think is worth considering is Diageo (LSE: DGE). Up 6% in a month, shares of the alcohol giant have been trying to recover lately. However, they are still down 31% in two years!
This leaves the stock's P/E ratio at 18. That's a significant discount from its 10-year average of 24.4, and looks cheap for a blue-chip company that owns premium brands like Johnnie Walker whiskey, tankray Geneva, Don Julio tequila and of course Guinness.
One risk here is that health-conscious Generation Z is drinking less alcohol, at least in the West. Some fear this means the global spirits market is in long-term structural decline.
However, the world is very big and Diageo is targeting the massive markets of China and India for long-term growth. By 2035, Asia could account for half of the world's middle-class consumers! It looks like a region full of growth opportunities for Diageo's timeless brands.
In my opinion, a dividend yield of 3.2% adds weight to the investment case.
