The Ball is in the Fed’s Court
Account values are up nicely after the S&P 500 experienced two 14% corrections over the last six months; this is something never witnessed before. The S&P 500 snapped back each time and S&P 500 valuations have now been tested twice. This could produce a more bullish consensus going forward. With the help from the European Central Bank and the U.S. Fed, fears over a slowdown in China, the strength of the U.S. dollar, a British exit, slow European and U.S. growth and Japan’s underperforming Abenomics were overdone. Incidentally, oil prices are up reportedly due to some optimism that a production freeze agreement will be reached soon.
Earnings for the first quarter of 2016 have been revised backwards to the point that investors now appear to expect the worst case scenario. However, as Q2 is underway, several data points appear to be improving. Consumer confidence and housing are up, the U.S. unemployment and labor force participation rates are improving, inflation remains in check, relatively low labor costs remain in check, the cost of money remains low, and market multiples appear to have been fully vetted.
For 2017, S&P 500 earnings have been gauged at $130. A P/E multiple of 15.4 times (low long-term average) $130 in earnings sets the S&P 500 2017 valuation at 2,002 points. A plausibly higher multiple of 17.5 times $130 puts the value of the S&P 500 at 2,275 for 2017. If this logic holds and earnings expand, the market downside and upside may be limited until the end of Q2. However, Q3 and Q4 earnings are projected to provide significant upside momentum. This opinion is in line with the recent comments made by Janet Yellen claiming that she did not see imbalances like clearly overvalued asset prices.
Two market adages go: “Never short a dull market” and “While bulls and bears make money, pigs rarely do.” In my opinion, this is the kind of market environment we are in now—a dull market with little short-term upside or downside. The trading range will become tighter just as the world’s central banks begin to take even bolder steps. Finally, as economic momentum improves and inflation nudges up to levels sought by the Fed to ward off deflation, an expansion in price-to-earnings multiples would not be far behind.
Vaughn Woods, CFP, MBA
Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views of Bolton Global Capital or Bolton Global Asset Management. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0213