Author Topic: S&P Nearing All Time Peaks from 2000 and 2007  (Read 3336 times)

tooqk4u22

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S&P Nearing All Time Peaks from 2000 and 2007
« on: September 11, 2012, 10:57:35 AM »
We all know there was lost decade and it is now getting back to at least a breakeven decade.  But I wonder if these peak levels will be tested by some selling due to the psychology and fear from not to distant experiences with these levels. The market was oversold after these peaks that were based on bubbles, and there has been a nice run over the last 12 months, and there has been some positive out of Europe.

I don't feel like there is any bubble going on right now other than in bonds but if that goes it should help stocks, not hurt them. Markets seem to be stable overall but there is some evidence of slowing in the US and China, Europe could be hit or miss, the fiscal cliff is non event and if anything will give a buy opportunity.

Sure there might be, and probably will be, a small correction/pause, but I don't see anything to drive the market down in a big way other than the psychology of hitting these levels.

One thing that gives me some comfort is if take the S&P in 1995 (just before any real shenanigans and bubble effects) and grow it at 7% you get to about 1580. To me that suggests the regression to the mean is playing out and if there is a big correction then buy buy buy.

Any thoughts on this, are you worried about it hitting peak levels?

MMM

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Re: S&P Nearing All Time Peaks from 2000 and 2007
« Reply #1 on: September 11, 2012, 03:09:22 PM »
Hey Tooq, interesting observations.

When it comes to the level of a stock index, I always like to look at the valuation (P/E ratio) and the dividend yield relative to historical levels, rather than the absolute quoted price which means nothing without knowing the earnings.

To me, the P/E ratio (trailing 10-year) even at today's price, looks much better than it did during the previous peaks, because the companies are actually earning MUCH more money than they were at the time of the previous peaks:
http://www.multpl.com/

On the other hand, the dividend yield is near a record low, suggesting that
- either companies are REALLY reinvesting their earnings and will grow much faster than GDP growth in the coming years
or
- some of the current earnings are at least somewhat unsustainable and/or bullshit, perhaps caused by the fiscal stimulus

Since the truth is usually somewhere between the two extreme views, it seems that it's not a bad time for long-term investing (by contrast, 2000 and 2007 were very obviously bad times, both at the time and in retrospect).

But a person who is more of a speculator-at-heart might roll the dice and wait for a 20% market crash, making a giant investment at that point instead.

mechanic baird

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Re: S&P Nearing All Time Peaks from 2000 and 2007
« Reply #2 on: September 11, 2012, 05:23:05 PM »
I have been spending a few hours a day reading on macroeconomics and since I work at a money management firm, I will chip in on what I observed...

Tooq, one thing is quite obvious. The corp profit margin is at record high. They have used the newly created money from the Fed to beautify their balance sheet by either refi their debt, do some investment... and NOT HIRING. Virtually across the board, the private sector is doing everything they can to be recession proof so they can survive long term. It's certainly a good thing for us investors who invest in equity market.

However, you have a few quite big things to worry about down the road. I will lay it out here and will give a final conclusion after that.
1. The global economic crisis will eventually come back home. With globalization, our large numbers of corps are no long pure US companies anymore. They derive significant income from overseas. If Europe debt crisis is not contained, if China and Brazil are heading for hard landing, we will sooner or later see it from our corp earning start to get softer. Actually, if you pay attention, the earnings are start to get weak.

2. From 2008 to 2012, the grand scheme of US economic has not improved from the fundamental perspective. Unemployment is still high, wage is flat, rising food cost is eating up consumer's discretionary spending. Meaning, this economy that largely depending on consumer spending has not improved. If you don't have people spending money, company cannot sell goods and services. Yes, their balance sheet might look pretty, but earnings will eventually get weaker if they are not selling.

3. Banking system around the globe is still fragile. The messed up CDS (credit default swap) market that tanked AIG is still messed up. Nothing got done in the last 4 years even though they introduced new regulation (google Dodd Frank) for the creation of clearinghouse for derivatives didn't do much good. Last time in 2008,it was just a small amount of mortgage backed security went bad.. The derivative market is enormously big, so if the sovereign debt goes bad, something bad could happen.

4. Then, you have the high pressure of inflation and higher interest rates. I am not talking about hyperinflation at all. anyone who pitches hyperinflation has no idea about the oil-dollar link. I won't go there.. But I am talking about some double digit inflation. You see, we have successfully exported a lot of inflation to emerging market like China and Brazil in recent years after Fed started printing money. This will eventually hit back home since our banks took the money and speculated and lend to these countries. But sooner or later, inflation will hit back home.. Interest rate is kept artificially low.. I am not predicating the rate will go higher anytime soon.. but eventually it will.. thus, the bond market will suffer.

So in conclusion, I believe the investors are discounting the mounting risks around the globe and there is a strong sentiment to push the stock market higher these days in the hope for more Central Bank actions..

When the weak corp earnings start to coming in, the stock market will get pulled back to reality. In another word, the investors are currently behind the curve right now..

Do I see a big crash? No. Stock market doesn't just crash. These perma bears are just scaring folks into buying their gold funds or whatever.. Even a 25% correction in S&P doesn't just happen cuz Fiscal cliff is near.. Do I see a 3%-8% correction? Absolutely.

The truth is, the market is going to behave a sideway step for a while until we sort through all the uncertainty. So, the strategy, especially if you are a mutual fund investors like most of you are, you should always have some cash ready and buy on market correction. When the market dips down by a significant percentage, put some more money in so you buy more shares. When the market is riding high, trim some hair, park some money aside... Keep a journey so you can track your prices. And don't go in and out too often, as mutual fund doesn't allow you to do that anyway...  ETF is a much favorable alternative though.

Based on what I read and what I see and what I got educated from my own industry, the financial money managers are embracing a long term sideway market for at least a few more years down the road... So plan accordingly.


tooqk4u22

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Re: S&P Nearing All Time Peaks from 2000 and 2007
« Reply #3 on: September 12, 2012, 08:40:23 AM »
MMM - I agree and I am not a chart/technical person so fundamentals matter way more to me, but there is still a degree of psychology at play and when combined with a pretty good run and a looming fiscal cliff it makes investors even more sensitive/nervous. 


Mechanic - decent analysis. 
#1 is spot on, although I like that companies are not US centric anymore. 

#2 is true but earnings will be flat or go down even if the economy improves because as you pointed out earning growth wasn't top line and instead was expense (cut to the bone) driven so if top line improves these companies will have to hire and invest in operations, all good for the economy but will slow profit growth in near term. 

#3 no f'in kidding.  Problem is actually worse than it was before.  Dodd Frank is a joke and makes it so small banks aren't viable and big banks are even bigger now than they were when they were to big to fail. 

#4 this is the one that I worry about.  Inflation is one thing and while it is in the periphery it is not much of a concern (partly due to the oil/dollar ling that you elluded to, which also translates to food and other commodities) but if interest rates rise significantly (BTW to 4.5% would be significant but not out of line with historial norms) that would pose a significant economic risk as housing would be more expensive, the US debt service burden would explode, and companies would have higher burden as well.  Sure I realize that rates typically rise when economy is better, but I believe that rates have had and still have about 1.0-1.5% of safehaven premium built in due to Europe and other issues and 1-1.5% due to Fed Twist - if Europe does get back on the right track this will go away instantly no matter what the fed does.   The US has too much debt and the moment investors have better alternatives there will be a huge vacuum sound in the bound market.


At the end of the day, I don't envision a crash but I do envision a correction in the 10-20% range like in in 2011 and and earlier this year for any number of reasons individually or in total - fiscal cliff, some country in Europe will surely become an obstacle to the latest news, US GDP growth and debt, China.

Sideways with decent periodic swings is how I see the market going for the next few years.

mechanic baird

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Re: S&P Nearing All Time Peaks from 2000 and 2007
« Reply #4 on: September 12, 2012, 09:40:45 AM »

Sideways with decent periodic swings is how I see the market going for the next few years.

You are definitely spot on. that's how I see it too. So I can't just "buy and hold" and do nothing anymore... The couple of corrections you mentioned in 2011 and earlier this year provided pretty opportunities to get some shares at decent valuation.. There should be one right around the corner ... I am parking some cash now and going to add some more positions at decent price again.

In addition, it's even more important than ever for people to apply MMM's way of living. When your expense is extremely low and you've got a decent stash to back you up, you can sleep tight at night.

Lars

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Re: S&P Nearing All Time Peaks from 2000 and 2007
« Reply #5 on: September 12, 2012, 03:27:09 PM »
One thing that gives me some comfort is if take the S&P in 1995 (just before any real shenanigans and bubble effects) and grow it at 7% you get to about 1580. To me that suggests the regression to the mean is playing out and if there is a big correction then buy buy buy.

Any thoughts on this, are you worried about it hitting peak levels?

I too am comforted that the US market seems to have worked out most of its excesses in the last dozen years. Personally I think the market will be sideways for another few (say 4-8) years (due to the things mechanic listed)  but I am not confident enough that a big correction will occur to hold my cash in reserve pending a big correction. Instead I plan to invest as money becomes available to match my current asset allocation.

Nice analysis mechanic.