The price-to-peak earnings multiple edged up to 12.2x as of Friday’s close. Stocks rebounded nicely as the S&P 500 gained 2.5% after falling four of the previous six weeks. European sovereign debt fears eased last week for reasons unknown; however, in periods of turmoil, often the absence of bad news is enough to justify a rally. Also, solid growth numbers out of China assuaged fears of a slow-down in one of the world economy’s remaining growth engines, news of which was well received by equity investors around the globe.
Regarding the US, earnings reports have slowed to a trickle and the economic calendar is light this week as well. Last week saw reports on consumer spending and consumer confidence, which—after parsing—were both slightly better than expected. (The consumer spending headline number was dragged down by a dip in sales at building supply stores, as the end of the government rebate program for purchases of energy efficient appliances had a negative impact.) From a valuation standpoint, we continue to believe that equities are more appealing after the recent correction. Corporate earnings continue to come in stronger than expected, and further earnings growth would justify higher stock prices.
The percentage of NYSE stocks selling above their 30-week moving average increased to 41% this week. This indicator of investor sentiment moderated somewhat in the last week, as investors proved more willing to place money into risk assets. This week may be pivotal as far as the market’s direction over the next few weeks as the lack of new data means bulls and bears will have an unfettered opportunity to provide some short-term clarity on which camp has the upper hand. We remain cautiously optimistic as we believe that stock investors may now have one of the better buying opportunities that we have seen in a year. However, there are significant risks out there that could cause sharp declines in very short order and with little or no warning.
Is the market correction over? The bull market has taken a much needed breather, but can we confidently deduce that the risks of Europe’s debt debacle, the gulf oil disaster and other worrisome global issues have been adequately priced-in? Being cautions, we cannot say that we are in a “screaming buy” situation given the high likelihood that volatility will remain elevated for some time. We would recommend buying strong companies that offer compelling fundamentals and solid dividends. Many of these firms have what Ben Graham termed a “margin of safety”, so that they will likely be among the better performers regardless of market direction. With the overall market’s valuation starting to look appealing and sentiment not overly bullish, the market climate may be right for buying quality stocks on dips. For some recommendations, as always we have included a quick overview of some of the largest US stocks on the last two pages of this newsletter complete with their current valuation.
