Is it complacency? Exuberance? Uncertainty? Exhaustion? Insight? Intuition?
Last week, all three major U.S. stock markets gained value and two reached new record highs. On the face of it, that’s great news for stock investors. However, if you look below the surface, the markets’ upward trend may have you scratching your head.
“That the S&P would hit a new high was all the more surprising given the lack of reaction to major headlines throughout the week. On the plus side of the ledger, Congress managed to avoid a shutdown, while on the downside, President Donald Trump tweeted that the U.S. ‘needs a good shutdown,’ and the Federal Reserve appeared more hawkish than prognosticators had been prognosticating. Nothing. Then there’s the prospect of a shocker in the French election over the weekend, though the pro-Europe candidate Emmanuel Macron is widely expected to beat the moreradical Marine Le Pen. Yet here we are. 'It’s like the market took Novocain and is numb to everything,’ says Thomas Lee, head of research at Fundstrat Global Advisors.”
It may be investors give more weight to company performance during the first quarter than to other factors. So far, 83 percent of the companies in the Standard & Poor’s 500 (S&P 500) Index have reported first quarter earnings (earnings measure a company’s profitability). Three-fourths of the companies reported earnings were higher than had been estimated, reported FactSet.
Strong earnings show companies have performed well. Price-Earning (P/E) ratios help investors gauge whether a
company’s stock, or a stock index, is a good value. The P/E ratio indicates the dollar amount an investor may pay to receive one dollar of a company’s or an index’s earnings, according to Investopedia.
Last Friday, the trailing 12-month P/E ratio for the S&P 500 Index was 21.9. That’s quite a lot higher than the fiveyear average of 17.4 or the 10-year average of 16.7.
At the same time, the forward 12-month P/E ratio for the S&P 500 Index was 17.5 or 22 Case- Schiller. That’s also a
lot higher than the five-year average of 15.2 or the 10-year average of 14.0.
So, why are highly valued markets moving higher? It’s a puzzle.
GPS STRATEGIES the market is also looking at what the Trump administration might get passed, mainly tax-cuts
and spending – infrastructure and defense. We have had a nice run in infrastructure and are considering defense and adding to our emerging market positions. Our bond allocations remained mixed between funds that can do well in both rising and falling interest rate environments. On the stock side we are keeping our developed international positions, a dedicated ETF investing in Europe and are considering an international small cap value fund as valuations overseas are much more attractive than domestic valuations. With the market approaching a potential tipping point we may add some hedges via and index called the VIX which is at a 22 year low and could serve as a protection mechanism with not a lot of outlay should the markets falter as well as other potential hedges. Summer is typically not a great season for the market so keeping our “eye on the ball” is important.
IS THE U.S. GOVERNMENT WELL RUN? Stop rolling your eyes. The Economist reported Steve Ballmer, former head of a large tech company, has been working on a new project – completing Form 10-K for the United States of America. The project is called USA Facts: Our nation, in numbers. Remain unchanged. Even though the market is highly valued we continue to own equities at a nearly neutral level. Typically, there is a big surge into the market
before it tops and that has not occurred.
If you’re not familiar with Form 10-K, it is the global gold standard of corporate disclosure. United States regulators require public companies to provide comprehensive overviews of their businesses and financial condition each year, including audited financial statements. The information is provided on Form 10-K.
USA Facts aggregates publicly available data from federal, state, and local governments. It then groups the data into four operating divisions based on the ‘missions’ described in the U.S. Constitution:
• Establish justice and ensure domestic tranquility
• Provide for the common defense
• Promote the general welfare
• Secure the blessings of liberty to ourselves and our posterity
After reviewing USA Facts, The Economist wrote:
“Governance is poor. The country is not managed using a coherent taxonomy. So, for example, the House of Representatives, the Senate, and the White House each split the job of running America into roughly 20 operating divisions. But their categories are different, meaning crossed wires and insufficient accountability…”
The findings aren’t much of a surprise. The government does not compare favorably to corporations. It has a profit margin of negative 3 percent. (The S&P 500 average is 8 percent.) It invests more in the future than most companies. Research and development and capital expenditures are 12 percent of revenue. (The S&P 500 average is 8 percent.) Debt is 289 percent of tax revenues, which are a proxy for sales. (The S&P 500 average is 77 percent.)
If you’d like to review the numbers, visit USAFacts.org
Weekly Focus – Think About It
“Ignorance and fear are but matters of the mind – and the mind is adaptable.”
-Daniel Kish, President of World Access for the Blind
The Jim Goodland Team at GPS
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* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
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* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
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>http://www.barrons.com/articles/stocks-ignore-the-headlines-and-hit-highs-1494046842?mod=BOL_hp_we_columns (or go to
(or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/05-08-17_TheEconomist-A_Form_10-
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