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Have The S&P And Dow Seen Their Highs For The Year?
Via ConvergEx's Nick Colas,
Have the S&P 500 and Dow Jones Industrial Average seen their highs for the year? At this point in 2014, it’s probably a coin toss. There are several factors in favor of a further rally, to be sure. Corporate profits are still robust, revenue expectations are modest, and long term interest rates remain equity-friendly. On the flip side of the U.S. equity market coin: long term valuations are toppy, plenty of other markets (commodities, bonds) seem to signal an impending global recession, and a host of geopolitical concerns now seem to be hitting a full boil. Also, let’s not forget that the Russell 2000 peaked in, oh, March (1209) and July (1208) and is down 8.8% from that last high. By that measure, equities are already rolling over. It is true that markets climb a wall of worry. Until it falls on them.
* * *
Sometime in my early teenage years, my parents decided it was time I learn the appropriate protocols for dating. Since I had no actual prospects, the whole discussion was uncomfortable and unnecessary. Still, their faith in my eventual introduction to society was reassuring, so I let them talk. Their advice centered on the correct way to pay a restaurant bill. They assured me that this was very important.
I remember their counsel to this day, and it went like this:
- At some point during the coffee service post-dinner, your date will excuse herself and leave the table.
- This is your cue to ask the waiter for the check. You do this by signaling with a gesture that resembles the signing of a credit card slip.
- You take care of the bill and hand the folder back to the waiter and shake their hand to thank them.
- Your date magically returns, never having had to see a crass exchange of money.
Yes, my parents were from a different time and place so this was all they knew. Needless to say, I spent many years wondering why no one seemed to go along. The random times when a date did follow the guidelines never seemed to repeat itself, even when it was the same woman both times. I am sure somewhere – perhaps among minor European aristocracy – my parents’ advice is still relevant. But nowhere else.
I feel a similar confusion now, looking at charts of the S&P 500 and the Dow Jones Industrial Average. The playbook I learned in the 1990s was “Don’t fight the Fed”. When the U.S. central bank starts to raise interest rates, you ask for the check and move to the sidelines until things shake out. Until then, stocks are the place to be. But the price action of the last few days is causing flashbacks to my first dates as a young man. Which is to say confused and anxious that no one seems to know the script but me.
Have U.S. stocks peaked for the year, ahead of the Fed’s anticipated moves to raise interest rates in 2015? The simple case for a “Yes” answer is that markets discount earnings and macro events roughly 6 months in the future. If the Fed is to raise rates in Q2 2015 – the current wisdom – then a selloff starting about now would be perfectly consistent. At the same time, U.S. stocks have been resilient for years. A “Chicken Little” bearish case hasn’t been especially prescient during that time.
The bullish case for U.S. stocks is both reassuringly and maddeningly straightforward. There’s no real magic to the argument; it essentially hopes that investor psychology stays pretty much in the same vein as the last 5 years.
The highlight reel is as follows:
Corporate earnings remain robust. The S&P 500 index companies reported earnings of $25/share last quarter, and $27/share on an operating basis. This quarter is slated to run closer to $27/share reported and $29/share operating. Yes, I know companies buy back a lot of stock and that helps the comps. But that’s a good thing if you are a shareholder. Even if earnings grow no further, the S&P 500 will earn $108/share over the next 4 quarters. And that is an all-time record in the midst of a subpar U.S. economic recovery and a tough picture in Europe. Pretty impressive, that.
On this basis, valuations aren’t horrible. Damning with faint praise, yes, but consider the numbers. At current prices, U.S. stocks are at 18x earnings. Given that 10 year Treasuries yield 2.5%, that’s about right. And if corporate America can continue to grow the earnings base (and after the last 5 years of excellent bottom line results why doubt that?), then stocks have further room to the upside.
Interest rates remain low, which not only helps stock valuations but consumer purchases of houses, cars, and other big-ticket items. Job growth isn’t great – hence the low rates – but it is good enough to create some (2-3% GDP) economic growth.
Revenue growth in corporate America has been anemic since 2010, but expectations are quite low for Q3 and Q4 2014. After years of seeing their companies miss top line growth targets, Wall Street analysts finally have some beatable revenue numbers in their models. For the companies of the Dow Jones Industrial Average, for example, these are just 2.3% and 1.6% for the next two quarters. Consider that population growth runs 1% and inflation is 2%, those modest hurdles indeed.
The bearish case on the same points looks like this:
Valuations are super-rich by historical standards. Just look at the Shiller P/E, a measure of current stock prices versus the average of the last 10 years of corporate earnings. The current reading sits at 26.1x, against a long run average of just 16.6x. Black Tuesday of 1929 occurred at 30x, and the peak in the dot com era was close to 45. The post-war lows were in the early 1980s at less than 10x. Any way you look at this measure, U.S. stocks are not cheap. Not even a little bit.
If you just looked at commodity prices and bond yields, you’d be bracing for a global recession in 2015 accompanied by strong deflationary pressures. Crude oil at $90 and 10-year Treasuries yielding 2.51% are no one’s idea of a “Green means go” signal to buy stocks. When one market – stocks – signals the potential for further earnings growth and multiple others refute that optimism, it is time to grow cautious.
Geopolitical concerns seem to be taking a bite out of equity market confidence of late. The list of above-the-fold news stories that have taken chunks out of this market include: Russia/Ukraine, ISIS/Iraq, Chinese economic slowdown, Hong Kong protests and (as of tonight’s aftermarket announcement) Ebola in the U.S.
The bottom line is that the positive and negative stories for U.S. stocks are quite evenly weighted. Possibly as even as we’ve seen since the March 2009 lows. Yes, you could add more weight to one or the other sides of this scale, but overall the balance is pretty even. If the last five years of stock market history has any weight, the bullish argument should continue to hold and we will see one more run to new highs in 2014. As for me, I think I will ask for the check.
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Have the S&P 500 and Dow Jones Industrial Average seen their highs for the year? At this point in 2014, it’s probably a coin toss.
So anyway
The details of my life are quite inconsequential... very well, where do I begin? My father was a relentlessly self-improving boulangerie owner from Belgium with low grade narcolepsy and a penchant for buggery. My mother was a fifteen year old French prostitute named Chloe with webbed feet. My father would womanize, he would drink. He would make outrageous claims like he invented the question mark. Sometimes he would accuse chestnuts of being lazy. The sort of general malaise that only the genius possess and the insane lament. My childhood was typical. Summers in Rangoon, luge lessons. In the spring we'd make meat helmets. When I was insolent I was placed in a burlap bag and beaten with reeds- pretty standard really. At the age of twelve I received my first scribe. At the age of fourteen a Zoroastrian named Vilma ritualistically shaved my testicles. There really is nothing like a shorn scrotum... it's breathtaking- I highly suggest you try it.
Outstanding first post for a thread - Well done sir!
Listen Huxley.
What are you mad?! His story is quite fictional I can promise you that. This "GUY" should crawl back into "HIS" troll cave!
Speaking of trolls, why don't you crawl back undr your bridge.
Listen Engali.
Show tits or GTFO!
the post says nothing we may as well have some fun
I've seen the movie.
It is a beautiful day after all..Wait isnt it a holiday?
Wheres headbanger with his short call. Must be in the money...Oh right.
My birth mother was incinerated, and I only survived because her smoking carcass had formed a protective cocoon of slaughtered human effluence. A Belgian man and his fifteen year-old love slave were looting the accident scene, and came across a blood soaked baby, moi. They raised me to be evil. You know, that old chestnut...
hmm, where did I read that before? I swear I know those words from somewhere...
Listen Therory.
Let me be clear and give you a hint. If you google part of that "MONOLOGUE" you will find your answer. It's a hoax by our little troll.
Hey wild theories, this is where you heard those words first.....
https://www.youtube.com/watch?v=ZO3pUVbNSnA
This is the traditional pre-earnings ramp. I would even expect all indices to ramp throughout earnings, even if the earnings suck. Only shortly--very shortly--before the next FOMC statement would I expect to see a shudder of fear again. The algos have been Stockholmed, sorry bears. We might very well be sitting at ES 2050/2150 by the time this metallic bubble gets a little puncture.
you had a typo at the end, that should read 2500
Why so conservative? Move another 20 million into the 'no longer in the workforce' category, and I bet the unemployment rate would drop to around 3%! Think what THAT would do for the markets, that kind of growth in the economy!
Can you believe I made $7,000 last month working from home in my pajamas? You can too, all you have to do is go to this web site and BTFD:
WWW.BTFD.com
Yer a fuckin' genius, doc...great find!
Can't see 2500: the redistribution to fixed income and the reshaping of the curve is going to suck the wind out of equities with the slightest hint of the rate hike everybody is anyhow expecting.
The curve won't move that much. It won't be dramatic. Nice and gentle and the market will ride it out
Yield curve - BORING! What about profit-equity?
"Have The S&P And Dow Seen Their Highs For The Year?"
Dunno, but it seems that gold and silver certainly have seen their highs for the year.
Not in the market...don't give a shit.
Very unlikely.
The Fed knows that the stock market is keeping the US economy afloat. So it must be manipulated higher, even if it takes thousands of Kevin Henrys.
Besides, you must be a terrorist if you short US markets. And a very poor one.
It is my belief that a rising stock market is actually helping to destroy the economy rather than aid it...Debt-fueled buybacks, massive layoffs, cut organic growth initiatives, M&A to expand product portfolios and increase tax competitiveness, only to lay more people off. When execs find it more lucrative to boost their own stock rather than invest in REAL growth, that's all that they WILL DO.
Most just haven't figured this out yet...
Eventually the gap between the governments manufactured data and reality will be so great, that even the sheeple will begin scratching their heads...
Only foreign markets (FTSE, DAX, Hang Sen, Nikki, etc.) go down. In this global, interconnected economy, there are losers and winners. And this time, unlike 2008, looks like the USA is the winner! All that global deflation, guess it just means everybody's going full on investing in the booming US economy! WalMart greeter jobs for everyone! Let's celebrate with a supersized big gulp and a new episode of 'America's got Talent'!
Hell no, this market is the fed's policy tool. The fed will continue to pump this market up until ww3 or the dollar crashes.
Listen Roll.
The "WORLD" needs democracy in all financial "MARKETS"!
Hahaha no don't be ridiculous. This is just another dip to buy and the bottom is in. You could have bought the bottom yesterday morning. It was super obvious. Now the selling is over, higher highs are a given.
Yes, if only you were making more than minimum wage at Wal Mart, or weren't part of the 50% of the working population that's no longer in the workforce, you could have bought the dip yesterday (I use 'you' in the generic sense, I don't mean YOU specifically).
HOD not in yet.
Feds payed good tax dollars to ramp USDJPY, short Gold big time, and slowly ramping up futures.
So I think a good day for my calls on ES_F. Moar on it's way.
My advice for my kids is a bit different.
Date, Stay Single, Live with them.
Don't put a Ring on it. EVER.
Much simpler.
Listen Carbon.
You cannot avoid "PALIMONY" so good luck with it.
i thought it was to marry rich, and then get a divorce, and live happily ever after. The other option of course is to sue someone for anything, so long as you get some money out of it, and can retire early to some central american island or the virgin islands.
If Republicans get the senate, Dems will crash the market. So they can blame it on Republicans and "fix" it.
Listen Book.
You cannot crash "BITCOIN" markets!
Yay, it's in the right place now.
http://www.marketwatch.com/story/patient-with-ebola-like-symptoms-being-...
Listen Roid.
"ENOUGH" with the false emotions of "FEAR".
Yay definition, an exclamation used to express joy, excitement, etc.
A good start, but it has to make it's way to the golf course.
Well thier climbing the fence to get in. Zombie land
No, I'm not even going to waste my time reading the article. The "market"is a policy tool and as long as it remaine that way the direction is up.
This is just mind blowing. 5 years and 4 trillion "printed dollars" later.
"Amid wild fluctuations in stocks and range-bound trading in bonds this week, the U.S. dollar marched ever higher.
The currency is set to finish another week stronger, which would mark 12-straight weeks of gains, the longest winning streak ever."
and just for good measure
https://www.youtube.com/watch?v=8qGt4yeb6Wk
It used to be mind blowing, but nothing shocks me any longer. Digital "money"has changed everything and Schiff needs to come to grips with the fact that the fed isn't printing actual currency. As far as the dollar strengthening, it only make sense when all the central bankers are working together. The Euro/USD carry trade has been a good trade.
(Schiff isn't the only one)
True.
Mind blowing indeed. It's a.long demoralizing march through absurdistan.
Look at European and Asian markets (ex Shanghai) - collapsing. This is 2008 replayed, except, luckily for US equity investors, it is different this time for the US stock markets.
Yellen will just revise the Dow higher.
Listen.
Let me be real clear.
Bulls or Bears, it will or it won't, whatever. It was a good night in Bangalore after a "VERY" good week of trading. Lucky the tax man in India is not like the one in Scamerica!
The answer is "no." In fact, a tradeable low is in.
Because why? Jobs report? Earnings? Any real metric? Or just because there are so many dollars in the system no one knows what to do with them.
... just because... ;)
It's going to get a lot more surreal before 'real' sets in. Most everyone here 'recognized' the Lies a long time ago, but not mainstreet. That part is catching however, but in the interim, the Lies grow - exponentially, until you are going to wonder if you yourself might exist in a grim fairy-tale, rather than reality. It is at that point the flash of white light appears.
The American "Dream" is alive but only because people are stupid.
Well, I'm posting 30 minutes later, the Dow is +203 @ 17,004, so I'm going to say no, the Dow will make a new high before New Years. The calender is a bit tight because I'm not sure we've finished the current downward move and suddenly volatility is getting juiced. But I think we still have time to decline to the 200ma, bounce back up, and close above 17300, and close for the year around, oh, 17100.
The consequences of ending QE and ZIRP will show up next year, and could be anything at all, a static market, or down 10,000 or up 25,000. Have a nice ebola.
small caps topped-out on the monthly at 117.5
small caps lead on the way up so u can't have it both ways so yes, they lead on the way down
Next stop for the DOW...18,000. It's not just in the cards, it's in the computers.
36k, wmbz. 36k.
Would not suprise me in the least!
a death cross on spy,
http://www.barchart.com/chart.php?sym=spy&style=technical&template=&p=DO...
Luckily no one really knows what the Russel2K even is, so it can be allowed to drop some as long as financial media can report what everyone knows DOW is up, safely above 'magical psychological' 17,000.
"Yes, my parents were from a different time and place so this was all they knew."
That feel when you know those times will never return.