(click to enlarge)
When hiking in the Rockies in the Spring, you often have to descend to go higher. Looks like the markets may be doing the same. Is a modest correction good for investors? We think so.
The S&P 500 hit an all time high on Tuesday, and then proceeded to close the week down 1.31%. We are in for some volatility as we enter earnings season.
The S&P 500 hit an all time high on Tuesday, and then proceeded to close the week down 1.31%. We are in for some volatility as we enter earnings season.
(click to enlarge)
At the beginning of 2013, Q1 earnings were expected to rise 4.3%. The outlook is now 1.5% as the consensus is that earnings will disappoint. The economy is fragile and revenues will be light, the test will be the firms abilities to deliver at the earnings level. We like the PE ratio of the S&P at 12 to 15 times. At almost 18 times, we feel the market is due for a little pullback. Hopefully all that cash on the sidelines will go to work and we'll climb higher. It is not unrealistic that we will see a multiple expansion fueled by low interest rates.
(click to enlarge)
With several stops along the way, we'll continue to see the markets climb. The recent jobs report was horrible. While the unemployment rate declined to 7.6%, the economy added only 88,000 jobs in March. We are not adding jobs at the clip expected and more people are dropping out of the labor force. The labor participation rate has fallen to its lowest rate since 1979, 63.3%.
We have yet to see the impact of sequestration and austerity. Government spending cuts will create a drag that will begin to be felt at the end of April through June. Workers will begin to take days off without pay, things could get very ugly. The fiscal drag will keep unemployment high and job growth will remain slow.
We have yet to see the impact of sequestration and austerity. Government spending cuts will create a drag that will begin to be felt at the end of April through June. Workers will begin to take days off without pay, things could get very ugly. The fiscal drag will keep unemployment high and job growth will remain slow.
The economy is fragile and the Fed realizes that. They will continue to keep interest rates low and will not dial back bond purchases until things improve. Monetary policy will be loose for the next 18 to 36 months. These markets do not match the economic picture, but we've know that all through this bull run. Retail investors don't trust it, there is no technology or business boom fueling it, it's purely a Fed driven run. So how long will it last? As long as the Fed is involved and unemployment remains high, we'll continue to experience pullbacks on our way to new highs.
It's a catch 22 that will go on for sometime. Revenues will be tight, companies will not hire, earnings will be accomplished by bottom line growth. No hiring, no economic growth. No hiring, no Fed easing. No Fed easing, more low interest rates. Continued low interest rates, markets continue to rise. Where else are you going to go for returns? You can not sit on the sidelines for another 36 months. When hiking, are you willing to backtrack 250 VF to ascend for 1,000 VF? Sua Sponte.
Bradford C. Bruner for Sua Sponte Wealth Management
It's a catch 22 that will go on for sometime. Revenues will be tight, companies will not hire, earnings will be accomplished by bottom line growth. No hiring, no economic growth. No hiring, no Fed easing. No Fed easing, more low interest rates. Continued low interest rates, markets continue to rise. Where else are you going to go for returns? You can not sit on the sidelines for another 36 months. When hiking, are you willing to backtrack 250 VF to ascend for 1,000 VF? Sua Sponte.
Bradford C. Bruner for Sua Sponte Wealth Management
