"To the average investor all this mumbo jumbo can be daunting. Even if you are a monthly contributor to buying indices and going about it over decades, buying the index each and every month at the end of the month, you are collectively owning companies. And you are not going to time your monthly contributions based on what the markets are doing. The first question I always get asked amongst my friends and various social groups (school parents and sports parents) is "How are the markets?" I am not ever sure what the correct response is to such a question. Still there? Not going away? Championing capital? Working hard for all of us? The answer that the person is looking for is almost certainly the market levels. I guess I shouldn't be so precious, the question is probably exactly the same as: "How is business?""
To market, to market to buy a fat pig. Monday! Obviously not that song that U2 wrote, no wait that was Sunday. And in fact if you search (search is now interchangeable with Google I notice) for Bloody Sunday, there are multiple events. Sadly. Friday was far from bloody though, the S&P 500 reaching new highs by the close. Ditto the Dow Jones Industrial Average. The Nasdaq composite index, or more familiarly known over here as the nerds of Nasdaq? Why the nerds of Nasdaq? If you are a Monty Python you will make sense of the reference deriving from the Knights who say Ni scene. Anyhows, getting too cryptic, the Nasdaq is now down 13.68 percent from the closing high on the 10th of March 2000. I think that many people make too many references to market highs and feeling dizzy and was relieved to see loads of literature over the weekend with charts (which humans love, pattern recognition) showing that all time highs are as a result of both record company earnings and improving prospects in the US economy.
For instance, from the Pragmatic Capitalist, Cullen Roche, who writes that Rail Traffic Hits new high as Jobless Claims hit new Lows. Fewer jobless people and higher volumes of goods moved = Good. Or am I getting something wrong? The Quantitative Easing "experiment", as it were, is nearing an end and we should, by the end of the year see an end to this program. Better to call it a program than an experiment, because an experiment takes place in a laboratory.
And for all the people telling you that all the extra liquidity inflated asset prices, why hasn't the Fed winding their necks in by 40 billion Dollars a month, caused a collapse in asset prices? Because the interpretation of QE was all wrong in the first place, again some old posts from Cullen Roche which are worth reading again: Ben Bernanke explains that QE is not inflationary, just an asset swap and then of course The Fed is not monetising debt. I think that I can't fully fathom the full impact of either non-action by the Fed or law makers or the amount of action and new programs, either way this was all unprecedented and new. As such it attracted an enormous amount of attention and clearly many people got it wrong.
So, whether I fret about the impact or the broader economy, that is not our job here. We worry about companies and their prospects. Allocating your hard earned money to businesses that make progress, have enduring qualities and in general, you know the drill. But that is harder than it seems, it really is. Investing requires immense discipline and staying power. The courage to stay the course when seemingly the walls are falling down around you. Many folks are tainted by that period and have applied too much caution, looking for the next crisis.
Jeff Miller had an interesting piece over the weekend, that is always worth reading, titled Weighing the Week Ahead: More Clarity from the Market Message? You can see the conflicting push and pull of the different markets, but that is either presuming that the equities market is wrong or the bond market is wrong, can't they both be right or wrong at the same time? A bit like that Tim Noakes piece last night! Vegetables, potatoes, rice, meat, cream and so on, perhaps the secret is just balance folks, simple plain balance.
Again, if you find the "is the market overvalued or not" stuff interesting, there are a series of earnings projection squiggles that Dr. Ed Yardeni updates each and every week, for his research house, that is named after him. Here they are, again, they are graphs and patterns: Earnings, Revenues, & Valuation for the S&P 500 and the other two (400 and 600). The Forward consensus (rolling 12 months) for the S&P 500 earnings collectively is 125.08 Dollars. The S&P 500 closed at 1923.57 on Friday. 2014 earnings collectively is projected to be 119.64 Dollars, 2015 the number has shifted to 133.12 Dollars.
The growth projection at this stage, from the data that Yardeni has collected, suggests that S&P 500 companies will grow earnings by 11.26 percent from 2014 projection through to 2015. The rolling S&P 500 valuation is 15.37 times (based on 125.08 Dollars worth of earnings over an index level of 1923.57) and the PEG ratio (Price to Earnings divided by growth) is therefore 1.36 times. Now I am guessing that many purists would argue that is too expensive, the earnings growth rates do not justify a market level forward of 16 times plus. Historically (dangerous to compare different periods in time) the long term averages of the S&P is a fraction of fifteen. I do not think that any one market deserves to be compared to another, at any time in history.
To the average investor all this mumbo jumbo can be daunting. Even if you are a monthly contributor to buying indices and going about it over decades, buying the index each and every month at the end of the month, you are collectively owning companies. And you are not going to time your monthly contributions based on what the markets are doing. The first question I always get asked amongst my friends and various social groups (school parents and sports parents) is "How are the markets?" I am not ever sure what the correct response is to such a question. Still there? Not going away? Championing capital? Working hard for all of us? The answer that the person is looking for is almost certainly the market levels. I guess I shouldn't be so precious, the question is probably exactly the same as: "How is business?"
The conclusion is that markets go up, they go down. Markets could fall ten or fifteen percent suddenly and do from time to time. It could be worse. But by trying to sell out in anticipation of the next big fall means that A, you miss out on the next move higher and B you spend valuable time trying to predict what is going to happen anyhow, when that time and effort could be spent looking at a company. I think that is all, always more to follow however.
Home again, home again, jiggety-jog Stocks are marginally higher here. That is good for everyone who is long, I guess. Sell in May and go away did not work, that is a dumb meme that appears each and every year.
Sasha Naryshkine, Byron Lotter and Michael Treherne
Follow Sasha, Byron and Michael on Twitter
011 022 5440
No comments:
Post a Comment