Perhaps it was leftover profit taking from 2014 or perhaps it was fear of global deflation?
There are a plethora of worries as earnings reports have been less than robust with 227 of the 500 Index companies having reported earnings +2.1 % on sales+1.4 %. So far 37 large U.S. companies are reducing forecasts while 9 have issued positive guidance.
U.S. GDP rose 2.6 % in the last quarter, down from a 4.8 % average the previous two quarters.
Our 10 year Treasury note yield has continued to rise in price and the yield has dropped to 1.64 %. Global money flows have gone into” safe haven” bonds, even after amazing gains in 2014.
Since the ECB announced a 60 Billion/month QE program of its own; German 10 year yields moved to 0.30%, France 0.53%, UK 1.33%, Spain 1.41% and Italy 1.59%, all below U.S. levels.
30 year U.S. Treasuries now yield an historic low of 2.22%. Inflation and inflation expectations remain well below the FOMC’s target of 2%.
Japan and Switzerland with yields of +0.27% and -0.11% are some of the lowest in the world. Imagine paying a government to hold your funds for 10 years? Germany bunds have a negative 0.05% yield out to 5 years.
This price action scares investors into thinking that we may be on the verge of a global recession, contrary to the continuous happy talk from “money printing” Central bankers and politicians worldwide.
The U.S. economy is still the best in the West yet GDP grew only 2.4% last year.
Our Central bankers forecast a 3% GDP year in 2015, as they have for the past two years, and warn they may raise rates later this year.
The current 12 month forward P/E for the SPX is 16.3x earnings. This is above the 13.6, 5-year average and the 14.1, 10 year average. Earnings in 2015 are now expected at $123.47 versus $116.77 last year an increase of 5.7% although this consensus estimate has come down in the past few weeks.
While historically U.S. stocks are not cheap they are still attractive compared to current “risk free” interest rate yields. The yield on the SPX now about 2% is higher than our 10 year note as well as that of the developed world.
We have to look back to the 1950’s and prior decades to find a time when stocks paid out more in dividend yields than bonds. Additionally, payouts are now much lower as a percent of total corporate earnings and are tax advantaged. Finally, U.S. companies have enormous cash hordes to maintain those dividends.
The ECB markets save Greece appear to like the new QE program as European stocks have rallied post the Jan 22nd announcement. Global markets through Jan 30th are still -1.9 % year to date. Emerging markets are +0.6 % with positives in China and India. Japan is +2.3 % in 2015.
There are two key reasons why rates are so low around the globe:
1 In normal times, rates rose as economic activity picked up and dropped when it fell. With QE programs from the three major currency blocs; ECB, Japan and the U.S. , Central bank buying of huge amounts of their own as well as corporate bonds has distorted the price mechanism. This begs the question, “What happens when Central Banks stop buying “?
2- Given the period of deleveraging since 2008 we see excess capacity in labor and other capital markets. Time and again governments have not encouraged free markets to work freely. Central bankers, at this juncture seem to have done all they can with monetary policy. Now, it is time for politicians to make fiscal policy reforms including labor and tax laws to stimulate real growth.
Because of QE programs bond and stock prices have rallied however real economies are mired in slow growth.
We anticipate more of the same.
Douglas Coppola
John Coppola
February 2, 2015
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
