Dr. David Kelly and jos team at JP Morgan publish some of the best research i read each quarter in JP Morgan’s quarterly “Guide to the Market” and within that 75 page summary each quarter is a valuation table that again in my opinion, speaks to the SP 500 valuation question in a digestable way.
The above table from the 9/30/17 Guide to the Market updates and shows the history of key valuation metrics.
One point: Look to the far right of the table – at the end of 2015, the SP 500 ended the year near 2,040 – 2,050 with two valuation metrics at 16.1(x) forward earnings and 11.2(x) cash-flow.
At 9/30/17, the SP 500 ended the 3rd quarter at 2,519 or nearly 23% higher than late 2015 and yet the valuation metrics at 9/30/17 show a 17.7(x) P.E ratio and a 12.4(x) cash-flow ratio.
That’s not much of a change in valuation metrics over the last 23% move in the SP 500.
Analysis / conclusion: Readers can get run over listening to the financial media every day and the non-stop warnings over the market “crashing”. While there is no question the SP 500 is due for a correction, one strategy for readers is to pay attention to the large-cap stocks that are now trading over their late 1990 high’s. Many of those are found in the Tech sector and the Financial sector – the two sectors that had their bear markets last decade.
Schwab (SCHW) closed today above its March, 2000 high of $44.87 – many Technology and Financial names are working off or have competed years of technical consolidation and have good underlying fundamentals, and given that they are just “breaking out” of long bases, they might offer some downside protection in a bear market.
Given that we havent seen a 3% correction in the SP 500 for now the 2nd longest streak in history, a correction will come for sure.
What I tell clients is be attentive to bear markets that represent long-term damage to capital. A 20% correction is not a bear market in my opinion. The bear markets that Tech and Financials had in 2000, 2001 and 2008 were genuine bear markets. Long-term investors saw permanent impairment of capital and savings and wealth.
The only asset class I would think could see similar carnage would be Treasuries, and that would take a burst of inflation that hasn’t been seen in 30 years.
SP 500 earnings will be updated this weekend.
Thanks for reading…