What the title of today’s blog doesn’t tell you is that valuation is a slippery slope. Some of the seemingly cheapest stocks in the SP 500 are not really attractive values, but more “value-traps” which like the Siren’s of Greek mythology fame, lure investors in, only to see themselves dashed on the rocks. Ford, GM and Bed Bath all come to mind. All very cheap on a valuation basis, all adept at destroying investor capital. (Long GM, a little Ford.)
That being said, the market’s valuation, i.e the SP 500, is always used by both bulls and bears to make their respective cases.
Here is the updated spreadsheet on SP 500 valuation using JP Morgan’s Guide to the Market template, which is one of the few SP 500 valuation tables (that i know of) that incorporates cash-flow valuation for the SP 500:
(Source: JP Morgan’s Guide to the Market – apologies for the small print)
What’s fascinating to me is that since Jan 1 ’17, using SPY performance data on Morningstar Premium, the SP 500 is up roughly 26.5%, in terms of total return over that 22 months, while the valuation metrics like PE, Div yield, P/B, P/CF (price to cash-flow) remain unchanged.
Only Shiller’s P/E has managed to elevate a little.
The SP 500’s P.E is actually a little lower than early ’17 due to the corporate income tax rate reduction.
Summary / conclusion: CNBC’s Friday night show featured Carter Worth (again) who is a pretty good technician, and he pointed out that the brief move over January ’18’s high was a “bull trap”. The technicians – for good reason – seem to think the risk in the SP 500 today is a trade down to the February ’18 lows of 2,532.69. That was pretty close to the 200-day moving average in February ’18. On Friday, October 12th, 2018 the SP 500 closed just one point above the current 200-day moving average 2,767.13.
Fast Money was only brought up since a number of technicians read over the weekend noted the 2018 lows and the failure at the January ’18 highs, hence Carter gets the shout-out.
Personally, I don’t think the SP 500’s valuation at current levels are all that unreasonable, or even extended, but sharply rising interest rates and trade issues can “compress” valuation, and ultimately slow growth.
Note the market P.E and the price-to-cash-flow relative to this year’s mid 20% SP 500 EPS growth rate of mid 20%, or even next year’s expected 10% SP 500 EPS growth rate.
The SP 500’s valuation still seems pretty reasonable.
Thanks for reading.