This weekend’s Barron’s had two bullish articles about the prospects for continued stock market price appreciation. Below, I’ve copied the introductory paragraphs to the first of those two articles. The second article eerily reminds me of another optimistic piece written prior to the market rout in the fall of 2008. I’ll comment on that one in a later post, but for now here is a take that succinctly & reasonably highlights some positive aspects to this current market.
A four-week losing streak has sent the Standard & Poor’s 500 index down 6.2%, and stoked investors’ fears of a looming bear market. To many market pros, however, the dip has been like a Halloween horror movie—worth watching but not to be taken too seriously.
In fact, they now see a chance to load up on stocks after such indiscriminate selling. Even after Friday’s 1.3% rally, lots of quality stocks appear to be good buys.
Fundamentally, the market is fairly valued, but not overvalued, and the economic backdrop remains healthy. The U.S. economy looks to be growing at a healthy pace—4.6% in the second quarter and an estimated 3% in the third. Third-quarter earnings are expected to rise 5.1% year to year, according to FactSet. Employment and manufacturing growth reaffirm the trend, and while retail sales slipped 0.3% in September, falling gasoline prices have boosted consumer confidence.
“There’s a disconnect between the sharp market drop and the still-improving fundamentals of the economy and earnings growth,” says Kate Warne, a strategist at Edward Jones.
Trading patterns also indicate confidence in the longer-term outlook for stocks. Investors are paying more to hedge risk now than four months down the road, says Thomas Lee, head of research at Fundstrat. That “inversion of the VIX,” or volatility index, historically has been a sign that the market is nearing a bottom, so long as the economy isn’t in recession.
“Even if I don’t know whether we’ve bottomed, I’d still rather close my eyes and buy,” says Lee.
The S&P 500 traded for 14.6 times forward-four-quarter estimated earnings as of Thursday’s close, according to Yardeni Research. That’s down from 15.5 at the high, and up from 10.2 times at the March 2009 low. Today’s multiple is a slight premium to the 13.8 average multiple since 1978, the first year that data were compiled.
With 10-year Treasury notes yielding near 2%, investors also have more incentive to look to stocks for income, as well as price appreciation. The average S&P 500 stock yields 2%, and 35% of S&P 500 components had a dividend yield greater than the 10-year Treasury yield as of Thursday’s close, according to Lee. That’s twice as many as the long-term average.
The Federal Reserve has begun to hint that, should fundamentals falter, it might delay raising interest rates. The market currently is expecting the central bank to lift rates in mid-2015. A fourth round of quantitative easing, or bond buying by the Fed, can’t be ruled out, either.
“If people realize the world isn’t going to come to an end, you’re going to see them roll back into the market,” Yardeni said.
Investors have dumped shares in some sectors far more than in others. Energy stocks, for instance, have fallen 11% since a Sept. 18 high, and 15% since the start of September. Industrial and materials stocks also have tanked on concerns about a possible global slowdown.