US Market Entering the 9th Year of this Bull Market
$DIA, $SPY, $QQQ, $VXX
Valuation is not a great tool for market timing, as equity cycles can run longer that people think, and selling just because PE/R’ are high has repeatedly proven a mistake.
Consider the S&P 500, which as of now has spent 42 months trading in the upper reaches this current range, the cyclically adjusted PE/R. Notably, just 2X before has it stayed higher for longer, each time ending with major corrections, in Y’s 2000 and 2007.
This is bothering analysts and investors alike.
About $2-T has been added to American share values in just 8 weeks, with price momentum in the DJIA at levels not seen since the internet bubble.
The Bulls are in charge, and convinced President Donald Trump will inaugurate a cycle of profit growth that reins in valuations.
But to get where market Bulls see earnings going, the economy would have to make a move not seen since Y 1937.
Only on 3 occasions the US has gone 7.5 years without a recession, earnings have never grown 10% this late in the cycle. That is the rate that we analysts estimate for the S&P 500 in Y 2017.
Robert Shiller’s CAPE standard has taken its lumps lately.
If you heeded its signal you almost entirely “Uninvested” in the current Bull market cycle, the 2nd-longest ever. That CAPE ratios repeatedly widened since the 1990’s suggests to many that changes in the economy, ,the switch to service industries or the explosion of buybacks, may have rendered it obsolete.
Stock valuations have fattened this year as prices surged and profits stalled.
Using data on CAPE ratios provided by Dr. Shiller, stocks are more expensive now than 96% of time since Y 1871. Currently at 28X, the multiple has held 1 standard deviation above its historic average every month since July 2013.
While the ratio is about a year away from eclipsing stretches before the last 2 market highs, investors have not stopped buying.
The DJIA is now + 8% since Donald Trump’s election, that is perhaps the fastest rally ever to greet a President.
Confidence that President Trump’s plans on tax cuts and public spending will give earnings another boost has helped the S&P 500 extend its Y 2016 gain to 10%.
That being the case, it is not hard to see why investors are so committed to this Bull run.
This has been a year of grand market resilience, with the selloffs that followed Brexit and the US election lasting just a couple hours and at the most a few days.
Corporate profits do not look to be the reason for the resilience in here
S&P 500 companies are poised to see a 2nd year of negative growth after suffering 5 straight Quarters of profit declines. A deep look shows the index broke out of a 2-year range in Q-3 when income rebounded.
Anyone pinning hopes on a quick rebound must be aware that there have been Zero instances when corporate profits increased more than 10% 8 years into an expansion.
In Y’s 1968 and 1998, when the economy was this far along, S&P 500 earnings rose about 5% a year later. At a similar thing happened in Y 1990, profits fell.
Wall Street strategists surveyed forecast the S&P 500 will rise to 2,356 in Y 2017, a mark that represents a 4% increase from the last close.
Note that markets can stay irrational longer than investors can stay solvent, it is equally true that no episode of extended valuation in the S&P 500 has ever lasted forever.
To some, CAPE is undeserving of attention, a broken relic debased by the economy’s shift to service industries. It is no coincidence it keeps showing stocks perilously rich now, because stocks themselves have changed.
Do not ignore the record, as 2X’s in the last 20 years it has shown equities chronically overvalued, and 2X they have snapped back to the line.
“There is no question that stocks are not cheap,” Jeremy Siegel, the Wharton School finance professor, said in a TV interview Thursday. “It will be show me earnings, show me some of the good things you’re promising.”
Thursday, the US major stock market indexes finished at: DJIA -13.90 at 19819.91, NAS Comp -6.47 at 5432.08, S&P 500 -0.66at 2249.26
Volume: Trade was light with 700-M/shares exchanged on the NYSE
- Russell 2000 +19.9% YTD
- DJIA +13.7% YTD
- S&P 500 +10.1% YTD
- NAS Comp +8.5% YTD