The Bears May Get It Right Eventually
It is said that differing opinions is what makes a market. If there is one thing we know for sure about the current market, it is that the disparity between the opinions of what "should" be happening in the market versus what is actually happening in the market is about a mile wide.
One of the most confounding aspects of this market has been its refusal to pull back to any meaningful degree. Everyone has seen the statistics relating how long it has been since the stock market has experienced a serious correction. Yep, it's true. This has been one of the longest periods of time in history without the market experiencing a -10% correction. Look at a chart and you'll see that this market has been a one-way affair since the end of 2012. And the bottom line is this has been a bit of a nightmare for our furry friends in the bear camp.
With each new all-time high, the nattering nabobs of negativity continue to sound the alarm. It's only a matter of time, they tell us. This will end badly, just you wait and see, they proclaim. In sum, all those investors who are now perfectly prepared for what they should have done in 2000 and again in 2008 are making it their life's work to warn us of the impending doom that undoubtedly lies ahead.
It's Time To Fear The Fed (We're Told)
One argument the bears continue to make is that stocks wouldn't be where they are today if it weren't for the Fed's easy money policies and QE printing programs. Those seeing the market's glass as at least half empty contend that the gains in the stock market have been almost completely artificial over the last five years and in turn, the market will surely come crashing back down to reality once the Fed "exits" its current dovish policies and rates return to more normalized levels.
However, one of the most important lessons to learn in this business is to play the hand you've been dealt and not the one you'd like. In other words, it is vital to recognize that nobody cares about your opinion (or mine either for that matter) of the Fed's actions. Remember, in order to be successful over the long-term, investors must first learn to identify/understand what is happening in the markets and to then figure out a way to profit from it.
Another way to look at this point is to understand that the stock market is an "it is what it is" type of game. So, instead of complaining about why you are right and the market is wrong, it is more important to put your opinions and your ego aside and try to simply "get it right" in your portfolio.
Of course, those who are predicting death and destruction when the Fed starts to hike rates may be right. However, there is really nothing wrong with making the money that is available to you between now and the time the sky actually falls.
Valuations Will Be The Death of Us, Right?
Another complaint the bears have been shouting about lately is the issue of stock market valuations. Folks like Professor Shiller have provided the bears with ammunition to proclaim that the current market will turn out to be 1999 revisited and that dire times are ahead.
To be sure, Shiller's CAPE Ratio is at an elevated level. However, as we've discussed, there are other indicators, such as the Median Price-To-Earnings Ratio that show stock valuations are currently no worse than average. And for the record, there are a handful of other valuation indicators saying the exact same thing right now.
Remember, the "E" in P/E is at Record Levels
But one of the key points to understand about the valuation debate in general is that the denominators of the ratios being used are at record levels.
Remember, the "E" in the P/E ratio is earnings. And don't look now bear fans, but earnings are at record highs. It doesn't matter whether we're talking about GAAP earnings, operating earnings, or normalized earnings - they are all are record levels.
The same thing can be said of dividends. Sure, the P/D ratio is high right now (primarily because companies are emphasizing stock buybacks instead of dividend payments). However, it is worth noting that the level of dividends being paid out on the S&P 500 is at all-time highs.
Another valuation indicator that can be viewed as a bit worrisome is the S&P's Price-to-Sales ratio. The primary reason that the P/S ratio is elevated right now is the simple fact that the rate of growth of total sales for S&P 500 companies (we are using 12-month sales here) has been uninspiring for the past five years. But, but, but... we should also note that total sales hit all time highs in 2011, 2012, and 2013, and are projected to set another record in 2014.
So, while it may be simplistic, the key question is why are so many analysts horrified that prices are at record highs when earnings, dividends, and sales are at records as well?
Cast Aspersions If You Must, But...
As stated, this can be viewed as an overly simplistic way of thinking. But here's the deal. The stock market is a discounting mechanism that looks forward and not back. So, with stocks at all-time highs and refusing to succumb to the bears' wishes, it appears that investors expect things to improve down the road. And let's keep in mind that if earnings (or dividends, or sales) can grow at a rate that is better than expected, then prices can advance as well - without the valuation ratios becoming a problem.
The bottom line is this. If the economy continues to improve and if inflation can remain in check, then corporate profits will likely continue to advance. And, in turn, stock prices can continue to move higher.
This does not mean that a correction will not occur. No, pullbacks of 5 - 10 percent can happen at any time and for any reason. But what this does mean is that the inevitable death and destruction being espoused by the bear camp isn't likely to occur unless the environment changes.
Publishing Note: Although our trek through Iceland/England was scuttled at the last minute due to the seismic/volcanic activity in Iceland (and our plan to instead head to Napa/Sonoma had to be adjusted due to the earthquake), we are going to try our darndest to go on vacation through 9/4. Thus, I will publish reports only as time permits or as conditions warrant.
Turning To This Morning
Things are fairly quiet on this fine Wednesday morning. There are no major developments on the geopolitical front to report and the overnight markets were fairly quiet. This remains the height of Wall Street's vacation season and with no major economic releases scheduled for today, trading could be somewhat listless. Stock futures in the U.S. currently point to a slightly higher open.
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
- Japan: +0.09%
- Hong Kong: -0.62%
- Shanghai: -0.09%
- London: +0.06%
- Germany: -0.11%
- France: -0.15%
- Italy: -0.02%
- Spain: +0.19%
Crude Oil Futures: +$0.26 to $94.12
Gold: +$1.80 at $1287.00
Dollar: higher against the yen, lower vs. euro and pound.
10-Year Bond Yield: Currently trading at 2.365%
Stock Indices in U.S. (relative to fair value):
- S&P 500: +1.13
- Dow Jones Industrial Average: +22
- NASDAQ Composite: +1.78
Thought For The Day:
You can train your mind to see the good in everything.
Important Reminder: In order to keep pace with our growth, better serve our advisors and clients, and to provide scale for future growth, Heritage is teaming up with CONCERT Global - an SEC Registered Investment Advisor with more than $2 Billion in assets under management. CONCERT will provide more robust back-office, compliance, technology, and trading infrastructure. Client packets to make the transition will be arriving in the coming weeks.
Positions in securities mentioned: None
Wishing you green screens and all the best for a great day,
David D. Moenning
President, Chief Investment Officer
Heritage Capital Research
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