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Market Commentary
Economic Updates
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Weekly Commentary
March 22, 2010
The
Markets
Earnings
drive stock prices, right?
It's
easy to say that the stock market is nothing more than a "casino"
that is driven by "speculators," but over the long term, earnings do
drive stock prices. So, how do corporate earnings look these days? Actually, pretty
good.
We've
just wrapped up the fourth quarter 2009 earnings reporting period and 72% of
the companies in the S&P 500 beat earnings estimates, according to Thomson
Reuters, as reported by The Wall Street
Journal. For all of 2009, S&P 500 earnings came in at about $57, up
from $49.51 in 2008, but below the peak of $87.72 in 2006, according to
Standard & Poor's.
For
2010, Wall Street strategists expect S&P 500 profits of about $75,
according to Barron's. With the S&P 500 closing last week at 1160, this
means the index is selling at a price-to-earnings ratio (P/E) of 15.5 based on
expected 2010 profits. Historically, based on the trailing 12-months earnings, the
long-term average P/E ratio of the S&P 500 was 18.3, according to data from
Barclays Capital, as reported by The Wall
Street Journal. Therefore, if 2010 profits do arrive as projected, then the
current market may be undervalued
based on the historical P/E ratio.
But,
here's where it gets interesting.
In
1998, S&P 500 earnings were $44.27 while the index closed that year at
1229, according to Standard and Poor's and data from Yahoo! Finance. Yet, last
week, the S&P 500 closed at 1160--about 6% below the level of year-end 1998--despite the fact that S&P 500
earnings in 2009 came in at about $57--more than 28% above the level in 1998, according to Standard and Poor's. Even
more remarkable, S&P earnings in 1999 were $51.68 (still below 2009's
earnings) and the S&P 500 closed that year at 1469, which leaves our
current market 21% below 1999 even though last year's earnings were about 10% higher
than 1999's.
Are
you dizzy, yet?
In
short, earnings are significantly higher today than they were in 1998 and 1999,
yet stock prices are still lower. This seeming paradox occurred because
investors are placing a lower P/E multiple on today's earnings than they did on
1998's or 1999's earnings. That's the good news.
The
bad news is an alternative measure of the P/E ratio, which uses 10-year average
corporate earnings instead of just the past year, shows the S&P 500 at a
P/E ratio of 20.6. Yale economist Robert J. Shiller popularized this measure
and the P/E of 20.6 is currently higher than the historical average of 16 using
this methodology, according to The New York
Times. So, by this calculation, the current market may be overvalued.
So
which is it? Whether undervalued, overvalued, or just right, you can find data
to support any opinion. Nonetheless, we remain focused on helping you navigate
through this uncertainty.
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Data
as of 3/19/10
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1-Week
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Y-T-D
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1-Year
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3-Year
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5-Year
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10-Year
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Standard
& Poor's 500 (Domestic Stocks)
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0.9%
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4.0%
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50.9%
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-6.1%
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-0.4%
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-2.3%
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DJ
Global ex US (Foreign Stocks)
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0.1
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0.7
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57.1
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-6.0
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3.2
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0.6
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10-year
Treasury Note (Yield Only)
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3.7
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N/A
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2.6
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4.6
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4.5
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6.2
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Gold
(per ounce)
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-0.1
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0.1
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15.6
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19.1
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20.6
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14.5
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DJ-UBS
Commodity Index
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-0.1
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-4.9
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17.7
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-7.4
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-4.0
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3.0
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DJ
Equity All REIT TR Index
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2.0
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9.7
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103.8
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-10.6
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3.7
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11.9
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Notes:
S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude
reinvested dividends (gold does not pay a dividend) and the three-, five-, and
10-year returns are annualized; the DJ Equity All REIT TR Index does include
reinvested dividends and the three, five-, and 10-year returns are annualized;
and the 10-year Treasury Note is simply the yield at the close of the day on
each of the historical time periods. Sources:
Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.
Past performance is no
guarantee of future results. Indices are
unmanaged and cannot be invested into directly.
N/A means not applicable or not available.
THE
YEAR 2012 has
significance for some people as a year of either cataclysmic devastation or
spiritual transformation. For the people on Wall Street, it means something
entirely different--big bills are coming
due.
During
the heady days of the pre-2008 credit crisis, private equity firms and other
companies racked up more than $700 billion of risky, high-yield corporate debt
to finance buyouts and other transactions. Those loans start coming due beginning
in 2012 and there is some concern about the debt market's ability to absorb
them, according to a New York Times
article.
On
top of the corporate debt, the U.S. government is projected to borrow about $2
trillion in 2012 to fund its deficit. When you combine the financing needs of
the private sector with the government's needs, 2012 may turn out to be a
pivotal year. If the debt markets have trouble handling all this debt, one
outcome might be a rise in interest rates. If interest rates were to rise
precipitously, that could hurt corporate earnings, and, ultimately, stock
prices. This debt overhang will likely need to be resolved before the stock
market can reach a new all-time high.
Weekly
Focus - Think About It
"Valuation
matters. Over periods of decades, the average rarely happens; above-average
returns occur when P/E ratios start low and rise; below-average returns occur
when P/E ratios start high and decline."
--Ed
Easterling, author of Unexpected Returns:
Understanding Secular Stock Market Cycles
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Best regards,
Jim Forcella, CFP®, CFS
LPL Branch Manager
LPL Investment Adviser Representative
CA Insurance License #0635256
P.S. - Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.
Closing Reminders - Should your personal or financial situation change (i.e. Marital or employment status, beneficiary changes or income needs) please contact us at 530.222.6301 or 800.546.5573 for either a phone review, or an appointment. We want to ensure that your current financial objectives meet your personal circumstances.
Forcella Wealth Management Information - Are you receiving too much mail regarding your investments? You now have the option to receive your LPL Financial communications electronically! LPL Financial is pleased to offer the convenience of viewing shareholder communications, including the fund prospectus, annual reports, and proxy statements online. Visit the link below to be directed to a secure website where you will enter your LPL Financial account number and Email address. You will no longer receive shareholder communications information through the mail but can request a hard copy at any time. Please feel free to contact us if you have any questions regarding this form.
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Forcella Wealth Management
1600 Victor Ave ● Redding, CA 96003
Phone 530.222.6301 ● Toll Free 800.546.5573 ● Fax 530.226.1677
jim.forcella@lpl.com ● www.forcellawealth.com
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* This newsletter was prepared
by PEAK.
* The Standard & Poor's 500
(S&P 500) is an unmanaged group of securities considered to be
representative of the stock market in general.
* The DJ Global ex US is an
unmanaged group of non-U.S. securities designed to reflect the performance of
the global equity securities that have readily available prices.
* The 10-year Treasury Note
represents debt owed by the United States Treasury to the public. Since the
U.S. Government is seen as a risk-free borrower, investors use the 10-year
Treasury Note as a benchmark for the long-term bond market.
* Gold represents the London
afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is
designed to be a highly liquid and diversified benchmark for the commodity
futures market. The Index is composed of futures contracts on 19 physical
commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR
Index measures the total return performance of the equity subcategory of the
Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source
for any reference to the performance of an index between two specific periods.
*
Opinions expressed are subject to change without notice and are not intended as
investment advice or to predict future performance.
*
Past performance does not guarantee future results.
*
You cannot invest directly in an index.
*
Consult your financial professional before making any investment decision.
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Securities Offered Through LPL Financial Member FINRA/SIPC
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