Sep 24, 2020
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The Market’s Almost At A Record, But You Can Still Make Money From It

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Shutterstock The correction that hit in late January seems almost over with the S&P 500 hovering near the record high from back then. But there s another plus side: Stocks are cheaper after being run through this mill. Nicholas Atkeson and Andrew Houghton market sages with Delta Investment Management in San Francisco explain: Larry Light: Let us know about this market drawdown we ve endured for far of 2018


Nick Atkeson: When we talk with investors we are usually asked how we define a drawdown. Answer: the maximum decline from a high before a new high is achieved. The drawdown of the 2008 covered the recession period and then some The S&P 500 had a closing high of one 565 on October 9 2007


This marked the beginning of the drawdown. On March 6 2009 the S&P 500 closed at 683 with an intra-day low of 667. The drawdown was about 56%. The drawdown period didn’t end until March 28 2013 when the S&P 500 closed at a new high of one 569. Light: How long to drawdowns tend to last? Andrew Houghton: Drawdowns are not calendar year based


The S&P 500 declined by -37% in 2008. The full drawdown however lasted roughly five years and 3 months and had a maximum loss of 56%. The drawdown that began on January 26 2018 is now more than six months old. This is set double the amount of time drawdowns of this magnitude last on average since World War II


Atkeson: We are very virtually obtaining a new high and ending the present drawdown period. During the process this drawdown period the S&P 500 multiple on forward 12 month earnings has declined from about 18 times earnings to about 16 times. PROMOTED Grads of Life BRANDVOICE | Paid Program
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A New Partnership Aims To Help From a valuation perspective the market is more attractively valued today at 2 872 than it was when it first reached this high in January. When and if the S&P 500 reaches a new high it can add buying interest and another boost to the bull market


Light: What s the outlook for the rest of the year? Atkeson: As of this date all indications are we can have an outstanding year. In all 81% of the S&P 500 companies have reported earnings through Friday of last week. And 80% beat the earnings estimates and 74% reported revenue upside


Earnings are on pace to grow this quarter by 24%. Revenues are up 9. 8% year-over-year. This is excellent performance in a roughly 4% GDP growth economy. The consensus 2019 S&P 500 earnings estimate is $178. 64. At the best-ever high value of 2 872. 87 at the S&P 500 index the price/earnings ratio on 2019 earnings is 16


1. The 25-year average forward P/E is 16. 1. Given the significant earnings outperformance of the 1st two quarters we think consensus earnings estimates to be revised higher. Houghton: An investor may wonder why the stock market is up only about 8% on earnings growth of 24%. What is offsetting the earnings growth are rising interest rates


The 10-year Treasury rate has risen from 2. 4% to about 3% this year an advance of 25%. Rising rates increase the bargain factor applied to forward earnings to set up market valuation today. This year the market advance seems rational given the first inputs of earnings growth and rising rates


Ago we’ve used intermodal rail traffic—shipping containers that may be transferred from boat to rail to truck—as a fundamental measure of commercial activity. Year-over-year containers shipped were up 6. 9% in July and were by far the main ever in total for the month of July. No recession in intermediate-term sight

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