I have mentioned this before, but JP Morgan’s Guide to the
Markets is really full of awesome charts, graphs, and data. The edition for Q3 (note all data as of
10/31) can
be found here. Below are some of
things I found of interest and how they
affect your portfolio:
- From the market bottom in March 2009, the S&P 500 is up 174% and 23% above the prior 2007 peak.
- Best sector YTD is Consumer Discretionary, which is bullish given its cyclical nature. Further, it’s trailing and forward PEs are still below historical norms.
- Most valuation levels on the markets seem reasonable, thus it doesn’t seem that valuation will dislodge the rally. Though there is the exception of Shiller Price to Earnings Ratio, but even he admits this isn’t a short-term metric.
- One big market worry is profits as a % of GDP. This is at an all-time high. So if this reverts and profits are hurt this could affect the market or on the other hand valuations could keep rising. This undoubtedly ties to the poor employment picture.
- Interesting to note that when yields are below 5% and interest rates go up, generally stock prices have a positive return.
- Corporate balance sheets are very strong with higher % of cash and lower % of leverage.
- The earnings yield is the reverse of the P/E ratio, in other words, earnings divided by price: by this measure, the markets are cheap. Further, even if we get to the average valuation level on the earnings yield ration markets have historically followed with positive moves.
- Consumer balance sheets are improving and debt payments as a % of personal income look to be close to an all-time low. The household deleveraging cycle may be over, and consumers may begin to have disposable income, something which the economy has missed dearly.
- To me employment still looks ugly. Much of the drop in the unemployment rate is a result of people dropping out of the work force. On the other side of that equation, I also read elsewhere the following: if all 3M open positions in the US were filled, unemployment would drop into the mid 4% range. This is largely due to a skills gap.
- Inflation as reflected by the CPI is still tame, so the Fed is really under no pressure, and can be accommodative, which is bullish for stocks.
- Our oil imports our dropping, though we are the largest consumer. We also produce 12% of the world’s oil, second only to Saudi Arabia, and are expected to surpass them in 2015.
- Looking at the long-run chart on interest rates, it’s tough to tell if we have bottomed. Though I will say on a subjective note that the current interest rate move up has felt different.
- While the spread (the difference between two bonds with similar maturity) on high yields makes them look rich, municipal bonds look attractive.
- While domestic stocks have blown through their 2007 peak, Developed and Emerging Market stocks have not. This indicates that while the trend still favors the US, on the long-term basis these markets might be more attractive. Emerging Markets in particular; however this was the case last year at this time, and those who made that bet – we didn’t – have been very disappointed this year.
- Consumption in Emerging Markets is on the rise while US consumption is falling. This is good for a more balanced world economy.
- Europe still has some gaudy unemployment numbers, particularly in Spain and Greece where they eclipse 20%.
- US stocks have crushed every broad asset class YTD.
- 2013 should be the first year since 2005 since domestic equity funds will have positive fund flows. Glass half full - more flows from retail investors can push the market higher. Glass half empty -- retail investors don’t really move the market as evidenced by negative flows since 2009 despite a huge bull market.
The views and opinions expressed herein are those of the
author(s) noted and may or may not represent the views of Capital Analysts,
Inc. or Lincoln Investment. The material
presented is provided for informational purposes only. Nothing contained herein
should be construed as a recommendation to buy or sell any securities. As with
all investments, past performance is no guarantee of future results. No person
or system can predict the market. All investments are subject to risk, including
the risk of principal loss.
