FYI | Apr 22 2014
By Peter Switzer, Switzer Super Report
Back in January, the Wall Street Journal said this: “The US stock market is more overvalued than it was at the majority of the past century's peaks.” And this was based on six well-known valuation ratios.
But the WSJ did not say it was pull out time. Instead, it reminded us that in other bull markets these valuations were “even more overvalued.” I liked reading that. Even more importantly, John Wasik wisely added “no two market peaks behave the same way.”
This time is different
And this current bull market is a unique one coming out of near Great Depression experience, with central banks nuking the economic challenge with a monetary expansion that is unbelievably unique.
Ned Davis Research shows that there have been 35 bull markets (in the US) since 1900 and the average loss to an ensuring bear market was 31%.
On a P/E basis, the S&P 500’s P/E is around 15 and 24 out of the past 35 bull markets before they crashed were over 18, according to the Ned Davis Research, so 15 gives me comfort that we can give the US stock market a fair bit of benefit of the doubt.
By the way, if the current earnings season can surprise to the high side, it can take the P/E down. Share prices inevitably run ahead of earnings and that pushes the P/E ratio up, while better than expected earnings pushes it down.
To be honest, the WSJ article did show on other market-testing ratios the S&P 500 could be near a top but I think this is going to be a special bull market. Averages are made up of all-time highs and lows and I think the role of central banks, the low level of interest rates, which is the biggest competitor for stocks, and the improving global economic picture, keep me positive that this will be a longer than usual bull market.
So far, US earnings have been OK, considering the weather effects from the big freeze, which can’t be underestimated.
"Typically in any weather-related disruption, 25 to 35% of the economic activity is lost, but the majority of it is just deferred," said Jeff Kleintop, chief market strategist at LPL Financial, on CNBC. "The pent-up demand should boost second-quarter results."
And S&P Capital IQ says future earnings look very positive for US companies. This is a reliable forecasting unit I have followed since 2008.
Don't fight the Fed
Prominent economist, Ed Yardeni, formerly of Deutsche Bank and now at Yardeni Research, sees the S&P 500 topping 2000 this year – it is currently at 1872 – and so that’s a 6.8% gain. He thinks the prophets of doom expecting a bear market have not learned one of the biggest lessons of investment life – and that it is madness to fight the Fed. I say that’s especially so when the world’s heavyweight central banks are bonding together to turn around a global economy!
Another reason why I think this bull market has legs is that we really have not seen the broader market get sucked into the euphoria phase – the last section of a bull market. Sure, the Internet stocks have run hard and stupidly too high, but they have been brought back closer to earth in recent weeks. Here in Australia it has been dividend-paying stocks plus BHP and Rio that have done most of the hard work, taking our All Ords higher, but I find it hard to believe that cyclical industrial stocks will miss out on a surge in this bull market.
That should come when the greenback goes higher on rising interest rates and a better economy in the US, which takes our dollar down just as the global economy looks stronger, thanks to the actions of central banks. Macquarie’s research smarties have tipped this will be a long, slow grind higher and they are referring to both the economy and the stock market and that suits me fine.
Of course, our job here is to continually look for signs to confirm or deny these expectations and, right now, I am definitely no bull market denier!
Watch the earnings
One final point needs to be made. This week, 159 companies in the S&P 500, or about a third of the value of the index, report first-quarter earnings and this will help pass judgment on US corporate earnings, which are tipped to fall by 1.1%, which would be the first fall since the third quarter of 2009. Of course the weather will be blamed but this is short-term stuff and most of us are long-term investors, so what’s the best I can offer you?
Try this from Quincy Krosby, a market strategist at Prudential Financial: "The data are suggesting that we will gain economic momentum. There is a sense, more and more, that the economy won't run into another soft patch this year."
Also, the Conference Board’s index of leading indicators was out overnight and it rose 0.8% in March, after a 0.5% rise in February and a 0.2% gain in January. The expectation was 0.7% and so the stuff we are seeing now about the US’s economic future is getting better. I like that.
And by the way, company reporting so far has been better than expected and experts say when weather affects GDP, the production and demand is not lost but simply deferred, which augurs well for the economy and earnings for the rest of 2014.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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