SP 500 Now Slightly Undervalued, Supported by Monumental Stimulus

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This first table comes from JP Morgan’s “Guide to the Markets” as of 3/31/20. This table is updated quarterly.

Note the SP 500 dividend yield, and the third column for each quarterly block, which shows the “25-year average over / undervalued”.

The SP 500 is now considered “slightly undervalued” using the 25-year key valuation metric history.

Dr. David Kelly and his team do a phenomenal job compiling “the Guide” every quarter. It’s a 75-page report that details all aspects of the capital markets and the US and global markets and economies.

If you aren’t reading it you should be.

JP Morgan funds are used on the bond side for clients. The JP Morgan Income Fund is clients 2nd largest bond fund holding in aggregate.

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One of the most important calls I listen to every month is Rick Rieder’s monthly BlackRock call, where he takes listeners through 35-odd pages of economic and capital market data, focused mainly on the bond and credit markets, although Rick has some equity data as well.

In the graph above, note the table in the upper-right hand corner: between the central bank and liquidity injection, and between February and March, 2020, 19.8% of GDP (ok, let’s call it 20%) of additional stimulus was injected into the US economy.

On Rick’s call, I tried to listen for how this compared to 2008 – 2009, and I didn’t hear the total percentage, BUT the speed of injection had to be far faster than 2008 since Ben Bernanke and the Fed were still thinking he mortgage crisis was contained until the ultimate Lehman collapse.

The BlackRock Strategic Income Opportunities Fund (BASIX) was clients largest bond position as of March 31, and the 2nd largest client position across all client holdings as of 3/31/20.

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Here is the scariest chart i looked at this week: the SP 500 “monthly” chart shows the SP 500 breaking the trendline off the 2009 lows.

To regain that trendline, the SP 500 must retake the 2,625 – 2,650 area.

Many technicians have to be watching the December ’18 lows of 2,350 down to the latest drop of 2,191.

Clients own a small short position (Long SH ETF) in the event of a retest of the lows of the last 2 weeks.

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Summary / Conclusion: Being a longer-term, secular bull, (thinking there was a real, secular bear market from March, 2000 through April, 2013) I do not want to seem too bullish, but the goal of today’s post was to show readers that – looking at historical valuation metrics from one of the best quarterly market guides – at current prices the SP 500 is slightly undervalued.

Now the other question to ask is that – similar to a stock being undervalued using historical valuation metrics like PE, PB, discounted-cash-flow, etc. – is that individual security “undervalued enough” i.e does the market provide us with enough margin of safety to commit to longer-term positions for clients ?

The monthly chart of the SP 500 was posted just to show readers the primary concern about current SP 500 price levels.

The weekly SP 500 earnings analysis is now a nothing more than a wild guess.

Think about Apple: Apple’s revenue is still 55% iPhone’s as of Sept 30 ’19 and the store closings until early May ’20 will shutter a big portion of their retail biz. (A separate post on Apple is needed. )

SP 500 earnings are light this week, with Financial’s starting the week of April 13th, 2020.

Take all market opinions at time like this with substantial skepticism. The SP 500 could be down 10% or up 10% in the next two weeks depending on the CV-19 virus, economic issues and the interpretation of all this by the SP 500 itself. Evaluate all investment advice in light of your personal financial profile and your own comfort with risk.

A retest of the SP 500’s recent lows – or even the December ’18 lows of 2,350 – will tell us much around the daily action.

Thanks for reading.

 

 

 

 

 

 

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