It seems that all is well again in the markets as today the S & P 500 index tops 1,700 for a new all-time high. The quick rebound from its June correction shows just how anxious investors are to get in on this run that for the most part they have missed.
For the longer term the data suggests that the odds are good for this next leg of the current bull market to continue. With over 50% of companies reporting earnings in this current quarter, 68% have exceeded their estimates. Consumer confidence is rising, and even the reported jobs numbers have exceeded estimates. As measured by the current price/earnings ratios of corporate stock, the valuations are at historical norms at about 15 x earnings. In comparison, the ratios at the previous highs in 2000 and 2007 were 30x and 20x earnings respectively.
For the short term, there are a few concerns that may validate the argument that the market has reached overbought conditions. The past few weeks have produced higher daily volatility with investors jumping in buying each dip so far. The daily buying action has mostly been in the mornings and the selling in the afternoons. This is a bit concerning if you consider the old adage that “smart money trades in the afternoons and novice money trades in the mornings”. During this period market values have pretty much stayed the same overall. (See the graph below)
Recent statistics point out that currently 52% of households hold stocks in one form or another. This is down 13% from 2007 and is the lowest since 1998. Along with the considerable amount of stock that corporations are re-purchasing, this tells us that stock ownership is becoming more concentrated. Fewer total shares outstanding owned by fewer investors. More concentration can equate to more volatility. Add to this the recent data showing New York Stock Exchange margin debt (investors buying stocks with borrowed money) is at its all-time high, you have the recipe for sudden, volatile price swings.
And let us not forget about politics. The budget and ongoing debt ceiling issues once again come into play with the debt ceiling deadline being October 1st. These negotiations always lead to last minute deals after months of posturing in the media.
So some concern about investing new money at these current prices has validity. For the longer term though, we feel that prices could continue upwards for quite a while. If we do get corrections from current levels, we will take advantage of them and buy.
It seems from available data that the market’s rise this year has in large part been fueled by foreign investors looking for the most stable economy. There is no evidence yet that significant money has moved from the massive cache of cash sitting in bank savings accounts and money markets. Data on the historical redemption of over $78 billion in bonds or bond funds over the past 6 weeks shows that the proceeds mostly went to banks via savings accounts. As interest rates rise in the future, there will be more billions leaving bonds looking for a new home. Savers are getting quite antsy sitting on trillions in their accounts earning less than ½% while the equity markets have gains of 15 percent plus year to date.
The July through September period is historically volatile for market prices. Caution during this time is warranted, but do not become downright bearish.