(Posted August 23, 2016)
Here are some noteworthy observations worth considering as you wait for the slow-motion market to make a decisive move.
First, according to the Wall Street Journal:
“The past 30 days have been the least volatile of any 30-day period in more than two decades. Only five days during the most recent stretch saw the S&P 500 move by more than 0.5% in either direction, the lowest since the fall of 1995.”
Investment managers who need to deploy client capital are waiting patiently for a dip, but with the market at a literal standstill that hasn’t been seen in over two decades, no opportunities exist for an entry.
This chart of the S&P 500’s volatility is the lowest it’s been in a decade, signaling complacency in the market as views strengthen that that only thing that can bring the market down is the Federal Reserve and central bank actions:
This is what the market seems to be saying: problems in China don’t matter, Brexit doesn’t matter, and even lower earnings don’t matter, so long as interest rates are forced to stay lower for longer, the only alternative is to invest in stocks.
But earnings do matter. The fundamental mathematical formula for stock valuation is highly dependent on earnings, which is why historically, earnings and stock prices have moved together. Only recently has this relationship decoupled, which is disconcerting. Notice how the gap between earnings and stock prices have widened this year(
source):
Also, “adjusted” earnings vs operating earnings (a measure that more closely approximates GAAP earnings) has widened considerably as well (
source), and it’s no surprise that investors are latching on to the adjusted earnings to justify higher prices:
In addition,
a great article on Seeking Alpha exposed one of the tricks that has been going on for years in the market: how journalists often report that companies have beaten earnings expectations, but don’t disclose how low those earnings expectations fell just before “beating” them.
For example, take a look at how companies in the S&P 500 have consistently “beaten” earnings over the past few years:
…but little is mentioned about how those expectations were lowered drastically just months before so they could be beaten:
These are some of the reasons why we continue to maintain a relatively defensive allocation and approach to stocks at this time.
Rainier Trinidad, CFA
San Diego and Coronado’s Fiduciary Financial Advisor
Parabolic Asset Management
206 J Avenue
Coronado, CA 92118
rainier@parabolic.us
(619) 888-4070
Investment Risk Disclaimers: (i) Investments involve risk and are not guaranteed to appreciate, and (ii) Past performance is no guarantee of future results.
