I’ve been meaning to discuss an interesting article in Monday’s Journal: Bull Market, Showing Some Age, Plods On.
What made it intriguing to me was the use of multiple factors, whose interplay could impact stocks simultaneously (sound familiar?).
I started with E.S. Browning’s good market overview, and then edited it down into bitesize components:
Valuations: Price/earnings ratios still aren’t low by historical standards, but they are down from where they have been recently. By some classic measures, stocks have been getting cheaper. TO some, this suggests that they have room to rise. SPX index are trading at about 16 times future P/E (down from a 19 P/E in Jan 2005).
Cheap compared to Bonds: The Fed has tripled its target short-term interest rate, to 3%, since June, but bonds actually have risen in value since then, driving down the yield of the benchmark 10-year Treasury note to 4.3% from about 4.6%.
Interest Rates: The Elephant in the room is the Fed. Historically, when the Fed steps in to raise rates, it is moving to hold down inflation and slow economic growth. That tends to mean trouble for stocks.
The Economy: Data on the economy and corporate profits “remain strong.” Although investors have been bouncing between fears that the economy is either too hot or too cold, the bulls say it looks just right to them.
Corporate-profit Growth: Along with the economy, corporate-profit growth has been slowing. But it, too, is better than many had expected. First-quarter profit increases for the companies in the S&P 500 are running at 14%, according to Thomson First Call. That is down from last year’s 20% clip, but well above the 7.6% expected when the year began, and above the historical average, which also is around 7%.
Investor Sentiment: The bull aging, and that could be a problem. Since World War II, the average bull market has lasted a little more than three years. This Bull run began either October 2002 or March 2003. That suggsts that it nearing the end of what is its natural life span. Some believe most of the easy gains have already been made. Lately, a narrower group of larger stocks has been in the lead, typically a sign that the bull market is getting old.
Market conditions leading up to yesterday’s selloff including decreasing volume on each subsequent rally day, with narrowing breadth (advbance/decline). That is hardly the sign of a healthy market.
The WSJ noted that "Unusually, corporate profits actually have risen more rapidly than
stock prices for much of the current bull market, which began in
October 2002." As we mentioned last week, there is little correlation between a single variable and market performance.
Graphic courtesy of WSJ
Note that as GDP momentum has decelerated, it has made Market progress more difficult. The same applies to year over year quarterly earnings gains — the momentum continues to fade.
Bull Market, Showing Some Age, Plods On
Investors Keep Eye on Fed Rates Despite Strong Three-Week Run;
‘Time … to Go Back to Basics’
By E.S. Browning
The Wall Street Journal, May 9, 2005; Page C1
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