Streetwise for Friday, June 9, 2017
You must give those denizens of Wall Street credit; at least they show consistency; bulls and bears locked in a perpetual struggle each convinced the other is wrong.
Meanwhile, as I write this the S&P 500 has closed at 2,433.14, six points below its all-time high, while the Dow Jones Industrial Average closed at 21,173.69. Yet, it was not until May 15, of this year that the S&P 500 finally closed above 2,400, with a record of 2,439.07 chalked up on June 2, seven days ago. It was on that same day that the Dow hit its record high of 21,206.29.
Could anyone have predicted the markets’ recent moves? And if he or she could would they spill the beans to the rest of us? Not likely. Instead, they would be comfortably ensconced on a yacht somewhere with a direct line to some discount brokerage house.
Unfortunately, with no small amount of encouragement from the media, this predicting nonsense often gets out of hand. Take, for example, several recent divinations predicting a Dow of 6,000. That would be a 71 percent drop. Let’s get real. The worst bear market of my lifetime (72 years), was October 2007 to March 2009. A 17-month period during which the S&P 500 lost 56.4 percent, all of which has been subsequently recovered.
That decline was brought about by a long-feared bursting of the housing bubble, resulting in a rising mortgage delinquency rate that quickly spilled over into the credit markets. By 2008, Wall Street giants like Bear Stearns and Lehman were toppling and the financial crisis erupted into a full-fledged panic. By February the markets had fallen to their lowest levels since 1997.
As you peer into the black abyss of what lies ahead, keep in mind two of Wall Street’s key axioms. The first is that the performance of individual securities is uncertain at any moment in time. Second, the performance of a portfolio of securities is uncertain in the short-term.
Yes, I realize that no amount of prose can counter the emotions resulting from a loquacious news announcement about a day’s tumultuous treading activity. Therefore, consider once again the wise words of Wall Street legend Lucien O. Hooper, so often repeated here.
“What always impresses me,” he wrote, “is how much better the relaxed, long-term owners of stock do with their portfolios than the traders do with their switching of stocks. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional; he does not incur unnecessary brokerage commissions; and he avoids behaving like Cassius by ‘thinking too much.’ ”
The thunderheads that roll over Wall Street are often dramatic but generally pass quickly, leaving behind clear blue skies that will once again invite one and all to come out and frolic in the sun. However, lest you become too complacent and leave the old umbrella at home, remember you are still faced with the dilemma of what constitutes fair and reliable value.
One often talked about way to investigate market valuation is to study an index’s historic price-to-earnings (P/E) ratio using trailing twelve months (TTM) earnings.
As of June 7, the trailing 12-month P/E was 24.08, a reading virtually unchanged from a year ago but considered to be too rich for bottom feeders. By the same token, the dividend yield on S&P 500 index stood at about 1.95 percent as compared to 2.18 percent a year ago and the index trades at about 2.75 times book value, as compared to 2.85 a year ago.
So, are the financial markets headed towards new highs during the remaining months of this year? Or are stock prices likely to remain under pressure due to what some believe to be over valuation, potentially higher interest rates and political uncertainty.
While only time will tell, it is dangerous to chase stocks simply because their prices are rising, it is also risky to conclude that they are attractive simply because prices have fallen. What’s cheap today could get even cheaper tomorrow and what is expensive today could become even more expensive tomorrow.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.
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