
Stock market decides to put worries in the past
(St. Louis Post Dispatch)
“If bond yields fall, the valuation of stocks should rise unless there’s a change in earnings,” says Ken Crawford, a managing director at Argent Capital Management in Clayton. “Fundamentals ultimately drive stock prices, and companies are doing OK.”
July 12, 2016 (David Nicklaus)
Brexit wasn’t a big deal after all, and neither was the slowdown in China. So the stock market has decided, at least.
Traders pushed the Standard & Poor’s 500 index to a new high of 2,137.16 Monday, slightly surpassing the old record set in May of last year. The Dow Jones industrial average remains about 85 points below its record, but the broader S&P 500 is the gauge most money managers are judged against.
For investment pros who follow a long-term strategy and eschew market timing, the record is a vindication of sorts.
They’ve had to ignore 14 months of negative headlines about China, bankruptcies in the oil patch and the damage done to U.S. companies by the strong dollar, not to mention the uncertainty created by the U.S. presidential election.
In February, the market fell 14 percent below the old high.
Corporate profits were down last year, and investors were gloomy about the prospects for this year.
Less than three weeks ago, Britain’s vote to leave the European Union touched off a new round of hand-wringing. Would the EU disintegrate? Could a recession in Britain and Europe spill across the Atlantic?
The S&P 500 fell 5 percent in two days before investors realized that their fears were running well ahead of reality. For now, the focus is back on the domestic economy, where the news is mostly good.
“The market is reacting positively to the strong jobs numbers for June,” said Robert Jones, chief executive at Enterprise Trust in Clayton. “People are saying it’s not that bad out there.”
Anyone who was worried about the market being overvalued 14 months ago, however, probably has the same concern today. The companies in the S&P 500 trade for about 17 times their estimated earnings, compared with a 10-year average of 14.3 times.
Considering today’s low interest rates, that’s not so bad. Rock-bottom interest rates mean companies can keep borrowing money to buy back their shares, which boosts stock prices.
For investors, meanwhile, the alternatives to stocks aren’t very attractive. An S&P 500 index fund pays about 2 percent in dividends, which is a lot more than the 1.4 percent yield on a 10-year Treasury note.
“If bond yields fall, the valuation of stocks should rise unless there’s a change in earnings,” says Ken Crawford, a managing director at Argent Capital Management in Clayton. “Fundamentals ultimately drive stock prices, and companies are doing OK.”
We’ll find out in the next couple of weeks just how well companies are doing. Analysts polled by FactSet believe that second-quarter profits fell 5.6 percent, but they expect growth to resume in the third and fourth quarters.
If you’re an optimist, you might like to know that the markettends to do well when it hits a new high after a yearlong pause. If you’re a pessimist, you realize that the dangers from China, Brexit and the dollar are still lurking.
At the moment, though, they don’t look ominous enough to derail the U.S. economy. “Those are headwinds, but maybe they are only headwinds and not death blows,” Crawford says.
Jones figures that it’s best not to get overly excited about Monday’s new high, just as he wasn’t too worried about the recent selloffs. “We don’t think we are in a full-on bull market phase,” he said. “We think there’s going to continue to be a decent amount of noise in the market, and we wouldn’t be surprised to see a pullback from here.”