So, where does the market go from here? If you happen to know (for sure), please shoot me an email ASAP! Because I of course don't. But I can speak to what the possibilities are:
For starters, let's talk valuations. When we're looking at the price of stocks relative to underlying earnings (the commonly-used metric), stocks look expensive when their prices have increased faster than have their earnings to the point where, historically speaking, one of two things is likely (ultimately [meaning stocks can stay historically over-priced for a long time]) to happen: The price declines to a point at or below the historical average price to earnings ratio (that would be your correction or bear market [depending on the magnitude of the decline]), or earnings begin accelerating at a pace faster than the rise in share price (that would be your bull market continuing). As I suggested above, at this juncture some sectors look expensive, some look pretty good.
So, with that, where does the market go from here? Again, please email me if you know. Because I still don't.
So what do we look at now?
We look at the prospects for earnings growth going forward. Which means we look at the prospects for business going forward. Which means we look at the economy:
With regard to the U.S., if you've been reading my blog you know that in my view things have truly been looking up of late. This week's indicators, on balance, continue to support that view. I'll include the highlights at the end.
With regard to Europe, things aren't so good. So much so that the ECB is looking to embark on its own quantitative easing program (printing money and buying bonds), while the U.S. central bank is about to put a wrap on its (tapering to zero by October). We'll see if it works better for Europe's economy than it did for the U.S.'s (i.e., I don't credit the Fed with the now-improving U.S. economy). Some (not me) believe the bull market in U.S. stocks has been all about the Fed. That sentiment could very well inspire optimism toward Eurozone stocks, at least at the get-go.
As for emerging markets, while some economies are doing better than others, we're looking at---in the aggregate---about 6% economic growth this year. That's like 3 times better than where the U.S. is likely to come in and at least 6 times better than the Eurozone. In terms of their stock markets, the two index ETFs we use show average P/Es at discounts to the S&P 500 of 26 and 49 percent. Now, please, don't run out and put all of your money in emerging market index funds. Those economies and stock markets are the definitions of volatility. If you have a strong stomach, by all means, own some, but go lightly!
So, with all that, where does the market go from here? Okay, I've figured it out. But I'll limit my forecast to the remainder of 2014. You ready? Here goes: The Dow Jones Industrial Average (familiar index to most people)---currently at 17,122---will end 2014 above, below or right at 17,122. And I stand firm on that prediction...
Disappointed? Sorry... The fact is I'm just not smart enough to know what will motivate thousands of people who sit on either side of millions of shares of stocks trading hands on any given weekday (which, honestly, is great news for our clients). So, with that, and your need to know, in mind, here are the links to today's slew of articles from a publication its provider says is geared toward the "sophisticated investor".
Economist: Stocks No Longer Risky, Will Go Up 'Steadily'
The Dirty Dozen: 12 Key Reasons To Raise Cash And Get Defensive
No Fire In The Hole - Two Macro Trades For The Rest Of 2014
These 3 Things Will Keep Stocks Moving Higher...Which May Surprise You
Rate Raise Will Not End Investors' Hunt For Yield
The Demise Of American Yield
Equity Markets To Drop In The Fall
S&P 500 At 2,000. Now What?
Daily State Of The Markets: The Current Key: Breakout Or Fake-Out?
If, after reading each of the above articles, you've figured it out---in all sincerity---please DO NOT email me! Unless, that is, you're one of our clients. In which case you and I will immediately get together so I can bring you back to earth...
When it comes to the stock market, always think long-term my friend.
Here are this week's highlights from my economic journal:
New home sales disappointed in July. Which contradicts last week's high home builder sentiment reading and increase in existing home sales.
The Chicago Fed Activity Index came in better than expected and confirms the view that the U.S. economy is on an upward trajectory.
The Markit Services Flash PMI for July came in about as forecast, a little soft compared to the prior month, but showing reason for continued optimism. Here are the report's highlights:
Growth in the nation's service sector remains strong but has moderated this month, to 58.5 vs 61.0 in both the readings for final and mid-month July. Service businesses report strength among both household and business clients as new business remains strong. Employment is up but only slightly though the general outlook is very strong. Prices are accelerating sharply which the report attributes to fuel costs which is puzzling given the downdraft underway for gasoline prices.
The Dallas Fed Manufacturing Survey showed growth but at a slower pace than the previous month's reading. However, the employment component posted its "third robust reading".
The ICSC and Johnson Redbook retail reports show expansionary results on a year over year basis. Here are Econoday's highlights for both:
ICSC-Goldman Store Sales. Released 8/26/2014:
Store sales W/W Change: Prior -1.3% Actual +0.6%
Store sales Y/Y Change: Prior +3.8% Actual +4.2%
Same-store sales rose 0.6 percent in the August 23 week for a very strong year-on-year rate of plus 4.2 percent. The report cites strength across most categories and general strength for back-to-school demand.
Redbook. Released 8/26/2014
Store sales Y/Y change: Prior +3.7% Actual +4.0%
Boosted by solid demand for back-to-school apparel, Redbook's same-store sales tally came in at a year-on-year plus 4.0 percent in the August 23 week. Redbook notes that sales strength in the week was concentrated in the Midwest and South where school starts earlier than other regions. It also notes that sales of durables were sustained by demand for electronic goods. Based on this report and ICSC-Goldman released earlier this morning, store sales look solid for August.
TODAY'S DURABLE GOODS REPORT came in stunningly above expectations. However, it was all about a huge month for Boeing. Take that out of the mix and the report was, on balance, good enough to support the notion that the economy will continue to expand into the foreseeable future. Autos had a very good month...
THE FHA HOUSE PRICE INDEX AND THE CASE SHILLER INDEX WERE BOTH RELEASED TODAY. Home price gains continue to be uninspiring in terms of household wealth, but good news for potential buyers.
Today's CONFERENCE BOARD CONSUMER CONFIDENCE INDEX came in huge with at 92.4. This bodes very well for coming quarters... Here are highlights from Bloomberg's report:
Consumer confidence in the U.S. unexpectedly climbed in August to the highest level in almost seven years, reinforcing signs of a strengthening outlook for the second half of 2014. The Conference Board's sentiment gauge rose to 92.4, the highest since October 2007, from a revised 90.3 a month earlier, the New York-based private research group said to day.
Unlike other regional reports this month showing a slowing in the manufacturing sector, the RICHMOND FED REPORT SHOWS VERY GOOD GROWTH. Here's Bloomberg's summary:
The overall business activity index for mid-Atlantic region factories rose to 12 in August, according to the latest report from the Federal Reserve Bank of Richmond. The monthly survey of manufacturers based in the Carolinas, the District of Columbia, Maryland, Virginia and West Virginia, found that the new orders index rose to 13 this month from 5.0 in July. The shipments index rose to 10 from 3. The Richmond Fed's district accounts for about 9.1 percent of the nation's gross domestic product.
While I generally view a pickup in investor optimism as a contrary indicator, this month's STATE STREET INVESTOR CONFIDENCE INDEX showing a sharp increase (to 122.8) in optimism in Asia and Europe, is welcome---particularly in Europe---given the recent economic doldrums. Here's Econoday's summary:
Boosted by expectations for accommodative monetary policy, sentiment among global institutional investors is up a very sharp 7.0 points in August to a very strong 122.8. This month's strength is led by Asia, up nearly 10 points to 101.7 in a gain that reflects improved growth in China where a lack of inflation is raising expectations for continued monetary stimulus. Expectations for stimulus are also boosting sentiment in Europe where the index is steady at 127.7. North America is little changed at 110.3.