Bloomberg posted an article last week claiming “Stocks Cheaper Than Any U.S. Peak in 23 Years”. The first sentence sums up what I believe most investors are thinking:
Corporate profits that doubled since 2009 have left the Standard & Poor’s 500 Index cheaper than at all 34 peaks since 1989, even as options traders push the cost of protecting against losses to the highest in four years.
Let’s break this down, first I will address part I of that sentence.
- Corporate profits are strong.
- Valuations are not moving higher with the rise in profits.
In a vacuum, this is good news. Profits are up; valuations are not correspondingly rising, so it must be a good time to buy stocks. Not so fast though, you can’t ignore part II of the sentence (insurance costs are high):
- There are still a lot of risks out there; the article alludes to a few: Eurozone credit crisis, rising oil prices, China hard landing, possible softening US economy (not noted is the removal of stimulus from the system), abnormally high profit margins.
- Given the above, multiples remain low and insurance costs remain high.
- Further, I should note valuations are subjective and not all valuations models tell the same story.
So now what? If we can avoid the risks mentioned above, given the improving US data, strong profits, and lower valuation level, stocks should have a good year. That said, the risks mentioned are voluminous and highly impactful.
Thus, the current state of the markets seems reasonable and supports my overall opinion of the state of the markets this year.
