U.S. 10 year Treasury rates closed at 2.65% from nearly 3.0 % as the year began boosting bond prices.
The Polar vortex led to slower retail sales while Emerging Market weakness caused concern for some investors.
Fourth quarter 2013 earnings are still coming in and are better than anticipated.
Goldman Sachs recently published S&P 500 estimates through 2017 as follows:
2013 - $108
2014 - $116
2015 - $125
2016 - $132
2017 - $138
Given the median P/E multiple has been 15x forward earnings for the past 10 years we calculate a value of 2070 for the index late in 2016. This target is only 10.7% higher than today's 1870 level. Based on this calculation alone the market appears to be overvalued by 6.95 % today.
We know that history shows market returns deviate widely as sentiment moves from fear to euphoria. At today’s 16x forward estimates we are benefiting from low interest rates and abundant liquidity provided by the Fed and other Central banks.
To conclude that we've appreciated too much might be premature. Holding cash or bonds make for poor returns. Inflation remains low. Labor costs are under control while profit margins are at record highs as are Corporate Earnings. Dividends continue to rise and payout ratios are still low historically.
Without a recession or much higher interest rates this bull market will likely prove to be long lasting but not without sudden corrections along the way.
Doug Coppola
John Coppola
John Coppola
March 4, 2014
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Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.
