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.
|
Data as of 3/12/10
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500
(Domestic Stocks)
|
0.9%
|
4.0%
|
50.9%
|
-6.1%
|
-0.4%
|
-2.3%
|
|
DJ Global ex US
(Foreign Stocks)
|
0.1
|
0.7
|
57.1
|
-6.0
|
3.2
|
0.6
|
|
10-year Treasury Note
(Yield Only)
|
3.7
|
N/A
|
2.6
|
4.6
|
4.5
|
6.2
|
|
Gold
(per ounce)
|
-0.1
|
0.1
|
15.6
|
19.1
|
20.6
|
14.5
|
|
DJ-UBS Commodity Index
|
-0.1
|
-4.9
|
17.7
|
-7.4
|
-4.0
|
3.0
|
|
DJ Equity All REIT TR Index
|
2.0
|
9.7
|
103.8
|
-10.6
|
3.7
|
11.9
|
| 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..
For your convenience the sources
have been listed below:
online.wsj.com/article/SB126851573867961861.html?KEYWORDS=sp+50...
online.barrons.com/article/SB126784011987856735.html#articleTabs_panel...
www.standardandpoors.com/prot/servlet/BlobServer?blobheadername3=MD...
www.nytimes.com/2010/03/21/business/economy/21fund.html?ref=business
www.nytimes.com/2010/03/16/business/16debt.html?pagewanted=1&partn...
en.wikipedia.org/wiki/2012_phenomenon
