Stock Market Pullback and Current Valuation11-04-2014 |
Sources: Rates Data and Economic Calendar—Bloomberg Markets as of 11/03/14; Equity Market Returns and Fixed Income and Alternatives Data—Wells Fargo Advisers as of 10/31/14
Stock Market Pullback and Current Valuation
During 2014 there have been a lot of critics questioning the valuation of the U.S. equity markets and a lot of news articles discussing whether investors would be smart to invest in U.S. stocks considering the debatably stretched equity prices. The argument against investing seems to be a function of the double digit returns the S&P 500 has experienced in 4 of the past 5 years, GDP growing at a sub-par pace relative to other historical recoveries and the unprecedentedly accommodative Federal Reserve’s pace of asset purchases. While some investors seem to have been waiting for a pullback before investing with the confidence that they will be able to spot the bottom and move cash off the sideline, the moment they have been waiting for this year may have come and passed them by already.
A pullback is typically defined as a decline in price of between 5-10% and after the S&P 500 index hit an all-time high of 2011.36 on September 18, it proceeded to sell off by 7.4% and close 4 weeks later on October 15 at 1862.49. Since then, the market has come back, eclipsing the historical market high reached during September and closing on Friday, October 31 at the level of 2018.05. This represented a year to date (YTD) return of over 9%. With interest rates remaining persistently low and foreign equity growth prospects looking weak in the short term, U.S. stocks may continue to move higher.
Earnings season is also underway and so far (as of 10/31/14) 362 companies have reported with 78% beating earnings estimates and 59% exceeding on their top line numbers. The 12-month EPS estimate is currently 128.53. Thus, with a closing price of 2018.05 the 12-month forward P/E ratio of the S&P 500 index is 15.9- or 1.85% below the 20 year average for large cap stocks of 16.2. More information on earnings season from financial information provider “Fact Set” can be found here.
Investors that are apprehensive about putting new capital to work in this environment should consider asset classes that can be used as counterweights to their equity market exposure. In order to help our clients navigate through periods of market volatility we utilize a wide range of asset classes and sectors, such REITs and commodities, in an effort to help mitigate the overall volatility of the portfolio’s returns. To understand more about how non-traditional diversification strategies are playing a role in Hennion and Walsh’s Portfolio Management group or to learn more about our market outlook, please contact your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Portfolio Management Team.
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