Monday, March 10, 2014

Making sense of today's market...

As I keep saying, stocks aren't cheap like they were a year ago. Which should elicit a big duh!, since the major averages were up 30% in 2013. But the thing is, stocks could have gained 30% over the past year and remained cheap like they were to begin with---that is when we look at them through the prism of the price to earnings (P/E) ratio. The reason they didn't remain cheap is because stock prices expanded faster than did the earnings of the companies they represent.

Here's the ever-thoughtful money manager and Bloomberg View columnist Barry Ritholtz making sense of today's market (this will sound familiar to regular readers): 
So, what does this market need in order to build additional gains?

Ideally, I would like to see five things occur:

1. Global economic growth must continue. Almost half of the Standard & Poor's 500 Index’s profits come from abroad. That means that U.S. economic growth may not be sufficient to keep things going.

2. Corporate spending and hiring needs to improve. Companies are sitting on enormous piles of cash and they need to start deploying some of it for the economic expansion to continue. We are starting to see some signs of this occurring.

3. Corporate revenue needs to expand. Surprisingly, the lack of corporate spending hasn't led to modest top-line growth. We continue to see earnings gains, but too much of it comes from a combination of cost cutting and productivity gains. I'd like to see top-line growth across the board.

4. Market needs to stay broad. Market rallies die when they become too narrow. Think back to the "Nifty Fifty" or the horsemen of the dot-com era. Broad-based participation in the market is usually a sign the end isn't approaching.

5. Sentiment needs to be skeptical, not giddy. This rally continues to be hated, as most of Main Street is indifferent to equity gains. So long as this rally remains a low-volume, low-excitement affair, gains can continue. Be careful once Mom and Pop come in. Historically, their timing is awful.

Note that I didn't mention valuations. If the five things listed above occur, valuation will take care of itself.

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