May Letter To Clients Part V
Equities Past 2009:
Stocks are certainly more expensive than they were in March but are still significantly below their previous highs. We are expecting sub par economic growth for at least the next 18th months. Both corporate and consumer balance sheets are still in the process of recovery. This should put a lid on consumer spending leading to that lower growth. Individuals are current savers of cash, rapidly reversing years where their savings rate was almost nothing. However, at some point that pent up economic demand should lead to a much better economy. We believe that stocks will begin to reflect that some time in 2010.
The S&P 500’s current P/E ratio (on a trailing basis) currently stands at 14.5, well below its 16.7 average since 1962. The trailing earnings yield (the inverse of the P/E ratio) is currently 6.9%.* Investors are being paid to own stocks right now, especially when viewed against the current anemic money market rates. Many ETFs also carry attractive dividend yields due to their depressed valuations. Even if one accepts that earnings will not soon significantly recover and that some dividend yields might still decline, investors can find many areas of the market where they can be paid good money to wait until better times.
Our chief scenario calls for an S&P 500 that could trade between 950-1,100 by year end and the potential to trade between 1,100 and 1,250 by year end 2010. This means stocks could potentially gain between 6-20% in 2009 and gain in excess of that 20% number by year end 2010. I’d also note that if the market traded at 1200 by next year it would simply be trading back at levels from last summer and would be trading around the same price where it first traded in 1998.
No investment thesis should be written in stone. There are many variables that could render our valuation scenario moot. We would then adapt them to current facts. However, we believe this is a plausible outcome and indicates that stocks are a better buy even after this most recent run up and certainly into any weakness that might occur this summer. As usual we will let our indicators be our guide.
Thank you for reading our letter and letting us serve your investment needs.
Stocks are certainly more expensive than they were in March but are still significantly below their previous highs. We are expecting sub par economic growth for at least the next 18th months. Both corporate and consumer balance sheets are still in the process of recovery. This should put a lid on consumer spending leading to that lower growth. Individuals are current savers of cash, rapidly reversing years where their savings rate was almost nothing. However, at some point that pent up economic demand should lead to a much better economy. We believe that stocks will begin to reflect that some time in 2010.
The S&P 500’s current P/E ratio (on a trailing basis) currently stands at 14.5, well below its 16.7 average since 1962. The trailing earnings yield (the inverse of the P/E ratio) is currently 6.9%.* Investors are being paid to own stocks right now, especially when viewed against the current anemic money market rates. Many ETFs also carry attractive dividend yields due to their depressed valuations. Even if one accepts that earnings will not soon significantly recover and that some dividend yields might still decline, investors can find many areas of the market where they can be paid good money to wait until better times.
Our chief scenario calls for an S&P 500 that could trade between 950-1,100 by year end and the potential to trade between 1,100 and 1,250 by year end 2010. This means stocks could potentially gain between 6-20% in 2009 and gain in excess of that 20% number by year end 2010. I’d also note that if the market traded at 1200 by next year it would simply be trading back at levels from last summer and would be trading around the same price where it first traded in 1998.
No investment thesis should be written in stone. There are many variables that could render our valuation scenario moot. We would then adapt them to current facts. However, we believe this is a plausible outcome and indicates that stocks are a better buy even after this most recent run up and certainly into any weakness that might occur this summer. As usual we will let our indicators be our guide.
Thank you for reading our letter and letting us serve your investment needs.
*Long ETFs related to the S&P 500
posted by CR English at 6:44 AM
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