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| Source: StockCharts |
It has taken a while for the S&P 500 to reach these levels again. This chart from JPMorgan should help put things in perspective.
When the S&P 500 first reached these levels thirteen years ago, it was trading at a forward P/E of 25.6 and competing with a ten year Treasury yield of 6.2%. Now, the forward P/E is 13.8 and the ten year yield is 1.9%. So as we have worked through the excesses of the tech, real estate and finance bubbles, overall corporate earnings have continued to grow. This has made valuations more reasonable and therefore stocks relatively less risky. At the same time, yields have come down lessening their attractiveness. With the Fed committed to its current low interest rate policies (think liquidity wave) until unemployment reaches 6.5%, there is no reason to think this relative attractiveness should change any time soon (baring some geopolitical black swan).
Since making new highs, the S&P500 has since pulled back a little. While a weaker than expected gain in jobs from the ADP report today was the reason cited for the pullback, a consolidation after reaching new highs is not too surprising. In addition, investors are anticipating announcements from the Bank of Japan and the European Central Bank Thursday and US employment data on Friday morning. All potentially market moving events.
While forecasts of EPS growth have been shrinking, the forward P/E of under 14 does not scream overvalued. On a positive note, Markit and JPMorgan announced that the JP Morgan Global PMI increased to 51.2 for March from 50.9.
When the S&P 500 first reached these levels thirteen years ago, it was trading at a forward P/E of 25.6 and competing with a ten year Treasury yield of 6.2%. Now, the forward P/E is 13.8 and the ten year yield is 1.9%. So as we have worked through the excesses of the tech, real estate and finance bubbles, overall corporate earnings have continued to grow. This has made valuations more reasonable and therefore stocks relatively less risky. At the same time, yields have come down lessening their attractiveness. With the Fed committed to its current low interest rate policies (think liquidity wave) until unemployment reaches 6.5%, there is no reason to think this relative attractiveness should change any time soon (baring some geopolitical black swan).
Since making new highs, the S&P500 has since pulled back a little. While a weaker than expected gain in jobs from the ADP report today was the reason cited for the pullback, a consolidation after reaching new highs is not too surprising. In addition, investors are anticipating announcements from the Bank of Japan and the European Central Bank Thursday and US employment data on Friday morning. All potentially market moving events.
While forecasts of EPS growth have been shrinking, the forward P/E of under 14 does not scream overvalued. On a positive note, Markit and JPMorgan announced that the JP Morgan Global PMI increased to 51.2 for March from 50.9.
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| Source Markit JPMorgan |
Given its large international exposure, the S&P 500 is highly correlated to global growth. The increase in global PMI is a good sign for better earnings in the future. While Europe remained a drag, the US continued its growth, the rate of expansion accelerated in China and Japan saw the first growth in ten months.
While Japanese manufacturing might have seen growth in March, the Nikkei has been consolidating after a large run up since mid November. Some of this is a function of a short term strengthening of the yen due to increased tensions with North Korea. In any case, a weaker yen is critical for an export led economy such as Japan's.
New Central Bank Governor Haruhiko Kuroda will lead his first meeting on Thursday. With the Nikkei approaching its 50 Day moving average the markets will be watching closely for signs of continued commitment from the BOJ to bringing the yen down and bringing inflation up. A perceived lack of commitment would probably be seen as a time to take profits in the Japanese markets.
Meanwhile in Europe, the resolution of the Cyprus banking crisis, has led to continued talk of contagion by pundits. So far calm seems to be prevailing as both Italian (4.62%) and Spanish (4.94%) ten year yields closed below five percent. The pressure seems to be releasing through the decline in the Euro (and drops in the Italian and Spanish stock markets).
