Archive for May, 2010

Market Perspective

Monday, May 24th, 2010

Last week was a volatile one filled with uncertainty that resulted in a sharp decline in stock prices. The Euro dropped to a four year low before rebounding a bit in what appears to have been a “short covering” rally. The 30-year bond yield hit fresh lows for the year and the S&P 500 closed on Thursday at the lowest level since February (taking out the so-called “fat finger” low).

There wasn’t a specific headline to account for the swings, though continued uncertainty about Europe is keeping negative investor sentiment in place for now.

Here at HFI Wealth Management, we continue the process begun earlier this year of reducing managed portfolio exposure to stocks. So though the markets are significantly lower, portfolio performance has compared favorably on a relative basis. We stand ready to continue protecting portfolio values if the stock market continues its march lower.

Putting Things in Perspective:

Take a look at where the market (S&P 500) has been over the last few years:

10/07          1565           S&P 500 All time closing high

3/09             683            Down aprox 56% from the peak

4/10            1219           78% above its 3/09 low and 22% below the 10/07 high

5/20/10       1071           12% below its 2010 high, down 4% ytd

Therefore, after a 78% advance from the March lows, the S&P 500 (so far) is experiencing a 12% decline (as of May 20th).

Why the recent increase in volatility?  Despite the confidence with which the media presents causality of any market event, you can never be sure of the direct cause of any short term changes in market sentiment.  Certainly, there are a number of qualified candidates:

  •    Budget ”Crisis” in Portugal, Ireland, Italy and Greece (PIIGS)
  •    Civil unrest in Greece due to the required reduction in entitlement spending
  •    Lack of confidence in leadership (Legislative and Executive) to get U.S.budgets  under   control and  fear that the European budget crisis is a preveiw of things to come in the U.S
  •    The implications of the ”Euro” crisis spreading and derailing the global recovery
  •    China taking actions to SLOW their economy due to rising inflationary pressures
  •    Fannie and Freddie’s continued drain on the U. S. taxpayer
  •    Continued high unemployment
  •    Irregular trading activity (most likely due to electronic order routing) which erodes      investor confidence in financial markets 

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Are Stocks Cheap at this Level? Maybe

Monday, May 3rd, 2010
“EVEN AFTER THE BIGGEST RALLY SINCE THE 1930s, U.S. stocks remain the cheapest in two decades as the economy improves,” according to an April 26 Bloomberg story. How can that be? Well, digging into the numbers a bit, it appears the statement comes with some qualifiers. First, the “cheapness” is based on the price to earnings ratio (P/E) using forecasted earnings estimates. By that measure, the S&P 500 is trading at 14.1 times forecasted earnings. As you know, forecasts may or may not come true so, if earnings actually fall short of the projection, then today’s P/E will be higher in retrospect.
 
Second, while the Bloomberg headline said stocks were the cheapest since 1990 based on analyst estimates, the article qualified that and said, “except for the months after Lehman Brothers Holdings Inc. collapsed.” So, yes, stocks may be cheap now, but they have been cheaper in the recent past.
 
But wait, in the same article, Bloomberg points to another market valuation measure that says the market is significantly overvalued. Using the 10-year average corporate earnings model popularized by Yale economist Robert J. Shiller, the P/E on the S&P 500 is currently about 22, which is well above the historical average of 16.
 
Bulls will point to the P/E using forecasted earnings estimates and say stocks are cheap. Bears will point to the Shiller calculation and say stocks are dear.

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