Stocks Soar, but Many Analysts Ask Why

[alienlovechild 75]

The unemployment rate remains locked in a range that recalls the economic doldrums of the early 1980s. Housing is stuck in a ditch, with foreclosures rising. And consumers are still reluctant to part with the little cash they do have.

Yet the stock markets are partying like it’s 2003, when hiring was brisk, real estate was booming, wallets were fat — and the major stock indexes started a four-year rally that would double their value and push them to new heights just before the financial crisis hit.

Judging from stock prices alone, one would think the economy was poised for a roaring comeback. But the federal government plans to unplug the economic life-support programs that stimulated production, kept interest rates low and placed a thick cushion under the real estate market.

Some analysts see ample reason for caution in equities, with many economists, including those at the Federal Reserve, forecasting tepid growth in the near term.

“The market is as overvalued now as it was undervalued a year ago,” said David A. Rosenberg, chief economist and strategist for Gluskin Sheff, an investment firm. “There’s a very high degree of complacency.”

The incongruity of it all can be seen clearly in an analysis of price-to-earnings ratios, a gauge of how expensive stocks are relative to their performance.

Ratios in the Standard & Poor’s 500-stock index are hovering about 13 percent above the average since 2005; a year ago, they were about 40 percent below the average. That suggests that investors are betting on robust earnings through the end of the year, a view that many economists do not embrace.

Recent rallies have been narrow, with a modest number of stocks reaching 52-week highs even when the broader market surged. There is a sense in some corners that stock prices will decline: investors are betting more on stocks’ falling now than they have since July.

Mr. Hirsch, citing historical patterns, predicts a 20 to 30 percent dip in the markets before they can climb again. The Dow Jones industrial average is more than 60 percent above its lows a year ago, flirting with 11,000 for the first time since the onset of the financial crisis, though it remains more than 3,000 off its prerecession peak.

The S.& P. 500 is up nearly 75 percent from a year ago, and the Nasdaq is up nearly 90 percent.

The first part of this year had glittering reports on fourth-quarter earnings and mildly upbeat news on economic indicators like retail sales and orders for durable goods.

In response, the broad-based S.& P. 500 has climbed 4.6 percent this year. Autos, consumer electronics, regional banks and home builders — all losers in 2009 — have led the way. Banking stocks, which drove much of last year’s rally, continue to surge, with many regional banks up more than 40 percent.

Even during some of the stock markets’ better weeks, jitters have seemed to lurk just beneath the surface. The Dow rode a rare eight-day winning streak this month, but trading was light and day-to-day gains were small, casting doubt on the significance of the uptick.

During much of the financial crisis, traders clung to bond funds for safety. But as the appetite for risk has returned, investors have begun snapping up stocks: over the last several weeks, new cash has poured into American equity funds at a brisk pace, and mutual funds have shown particular strength.

Many market participants expect the momentum to continue, with stocks ending the year 10 to 20 percent higher. While few expect strong economic growth this year, investors believe that the recovery is intact and that earnings will continue to grow.

There are signs that some of investors’ optimism may be excessive.

Interest rates, kept at historical lows by the Fed during the financial crisis, are starting to rise because of the flight from bonds and concern over rising debt, particularly that of the United States.

Standard mortgage rates hovered near 5 percent last week after auctions of seven-year Treasury notes were met with weak demand, sending yields higher. A sustained rise in interest rates would crimp growth by making borrowing more expensive for consumers, businesses and governments. It could also attract some investors away from equities and into bonds.

http://www.cnbc.com/id/36079665

[I AM NOT THAT GUY 5,715]

What is soaring? The market closed at 10927.07, up 70.44‎ (0.65%‎) on a light trading day, Good Friday, on some dubious news: "We are almost treading water!"

When the market starts to clear 12,500, then we can begin to say we are on our way to something, but soaring? I don't think so!

http://finance.yahoo.com/echarts?s=^DJI#chart2:symbol=^dji;range=5y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined

Edited April 4, 2010 by ##########

[scandal 951]

Q:

What is soaring?

A:

The S.& P. 500 is up nearly 75 percent from a year ago, and the Nasdaq is up nearly 90 percent.

Anything further? We're way overbought imho.

[Niels Bohr 72]

Let me ask another question.

Did god created the computer?

[scandal 951]

Let me ask another question.

Did god created the computer?

No. Al Gore created the computer. He also created God.

[Niels Bohr 72]

That's what I thought.

No. Al Gore created the computer. He also created God.

[I AM NOT THAT GUY 5,715]

Q:

A:

Anything further? We're way overbought imho.

I guess not too may analysts are left from before the market hit the bottom, or they have just been hitting the crack pipe too long, but if they sober up long enough to read a five year chart, they might notice the markets are a long way from moving into an historic region.

http://finance.yahoo.com/echarts?s=%5EGSPC#chart1:symbol=^gspc;range=5y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined

[scandal 951]

I guess not too may analysts are left from before the market hit the bottom, or they have just been hitting the crack pipe too long, but if they sober up long enough to read a five year chart, they might notice the markets are a long way from moving into an historic region.

It don't work that way Billie Boy. We were overbought, then we sold off. The sell off was extreme to the downside so yes we saw a bounce back which yet again has overshot. Markets do that - overshoot on the way up and down. Please don't tell me you think the levels of 2006-07 represented some kind of fair value we're supposed to see again any time soon. PE on the S&P is once again topping 20, where a historical average is around 16.

http://www.multpl.com/

[Niels Bohr 72]

I like your drawing.

It don't work that way Billie Boy. We were overbought, then we sold off. The sell off was extreme to the downside so yes we saw a bounce back which yet again has overshot. Markets do that - overshoot on the way up and down. Please don't tell me you think the levels of 2006-07 represented some kind of fair value we're supposed to see again any time soon. PE on the S&P is once again topping 20, where a historical average is around 16.

http://www.multpl.com/

[I AM NOT THAT GUY 5,715]

It don't work that way Billie Boy. We were overbought, then we sold off. The sell off was extreme to the downside so yes we saw a bounce back which yet again has overshot. Markets do that - overshoot on the way up and down. Please don't tell me you think the levels of 2006-07 represented some kind of fair value we're supposed to see again any time soon. PE on the S&P is once again topping 20, where a historical average is around 16.

http://www.multpl.com/

How convenient! Liberals have dumbed down schools by reducing expectations, and now they are doing the same thing to the economy. So, if investors just lower their expectations, then they will realize what a good job Larry Summers has done leading Obama's economic team.

http://abcnews.go.com/ThisWeek/week-transcript-nec-director-larry-summers/story?id=10280914

[Niels Bohr 72]

Don't send your child to Harvard. Afterall, Harvard is full of liberals.

[scandal 951]

How convenient! Liberals have dumbed down schools by reducing expectations, and now they are doing the same thing to the economy. So, if investors just lower their expectations, then they will realize what a good job Larry Summers has done leading Obama's economic team.

http://abcnews.go.com/ThisWeek/week-transcript-nec-director-larry-summers/story?id=10280914

We were talking about the equity markets, and valuations thereof. Politics plays a role in investor sentiment, no doubt, but until you interjected it we were focused on the market fundamentals and technicals. Having put you in a corner on that front, you turn to the trusty old standby - it must be Obama's fault. How typical. Bill, you can't argue your way out of a paper bag, you know that?

[I AM NOT THAT GUY 5,715]

We were talking about the equity markets, and valuations thereof. Politics plays a role in investor sentiment, no doubt, but until you interjected it we were focused on the market fundamentals and technicals. Having put you in a corner on that front, you turn to the trusty old standby - it must be Obama's fault. How typical. Bill, you can't argue your way out of a paper bag, you know that?

Oh, here come the ad hominem attacks! You attack the messenger, and yet, still manage to claim victim status.

[scandal 951]

Oh, here come the ad hominem attacks! You attack the messenger, and yet, still manage to claim victim status.

No, I don't think so. I mention PE ratios and reversion to historical means. You deflect by bringing in a political angle.

There is always legitimate debate when trying to forecast future earnings growth and the effects of economic policy, inflation, monetary policy etc. on those earnings and resultant stock valuations. You are certainly entitled to a view that stock prices are too low and should rise, if that's what you want to believe. But your deflection is not an argument, it's irrelevant to the subject at hand. My view is that we've risen too far too fast in the past year. I say that because of historical PE measures, and because we've had a tepid 3 - 3.5% GDP growth over the past few quarters. That's not enough of a recession snap back to justify robust corporate earnings that can explain the kind of stock trajectory we've seen. If we had had a 6.5% GDP growth with strong hiring and rising confidence I could see it. But -- we have not.

http://seekingalpha.com/article/178554-the-s-p-500-pe-ratio-looking-ahead-to-2010-2011

Using the December 2009 quarter, the earnings forecast $46.36, and a PE ratio of 25 gives us a target price for the S&P 500 index of 1,159. On Wednesday December 9, 2009, the S&P closed at 1,096. A PE ratio of 20 gives us an S&P 500 index of 927. If the S&P 500 PE ratio remains between 20 and 25, we should see the S&P 500 index climb to a range of 1,060 to 1,326 in 2010 and 1356 to 1695 in 2011.

Now look back at the forecast for the S&P 500 PE ratio through 2011. It is the first chart in this article. Notice that the PE ratio declines slowly reaching 16.16 by the end of 2011. From the table above, apply a PE of 15 to 17 and you get an S&P 500 forecast range for the end of 2011 of 1017 to 1152, about where we are now.

In other words, in order for the S&P 500 index to climb much further the S&P 500 PE ratio must remain in the 20 - 25 range. History tells us that this is unlikely. We are more likely to see the S&P PE ratio fall from its current level even as earnings rise.

[I AM NOT THAT GUY 5,715]