Eight percent rallies for the major averages brought the S&P 500 back to positive +1% returns year to date, while the DJIA was still down 0.9% as of Oct 31, 2015.
Global recession worries faded as the Europeans vowed further easing, China surprisingly lowered interest rates and the Fed blinked on its planned interest rate liftoff.
This year’s SPX earnings estimates have come down to $117.95 on lower than expected revenues. Earnings, however are anticipated to climb to $128.73 next year with sequential earnings gains by quarter of $29.75 – $31.74 -$32.86 -$34.38 according to Yardeni Research, Inc
Large cap growth stocks led the way with very positive results from Amazon, Apple, and Google among others, making up for poor numbers posted by industrials, energy, and transports. Income investments struggled in both the fixed income and equity arenas.
U.S. small caps are down YTD, while U.S. ten year notes finished October at a 2.15% yield not far from where they started 2015. Lower quality debt investments, Utilities and Energy MLP’s are all in negative territory year to date.
After stock markets dropped more than 10% this summer, bears were mauled in October with surprising action by the ECB, the PBOC, and the Fed.
Central bankers continue
to support global markets with QE and appear willing to continue
policies of extreme ease until economies strengthen and 2% inflation
targets are in sight.
Given this back drop, each time stock markets appear ready to go over a cliff Central Banks sound the alarm and come to the rescue.
At this point, in prior cycles we typically saw an economic pickup, higher interest rates as well as continued earnings growth as stocks advance to higher highs.
Share buybacks and higher dividends continue to support stock prices;
P/E ratios while generous are not extreme, given the low interest rate environment. At 2100 on the SPX we calculate a 16.3 x P/E ratio and 6.1% forward earnings yield.
If the world economy improves and the dollar does not soar too high, U.S. stocks appear both safe and a decent value relative to alternatives.
Notwithstanding investors desire to avoid excessive volatility, stocks appear to be the best place for long term capital gains.
Stock and sector selection is becoming more rather than less important as haves and have nots are experiencing far different returns. While we expect market averages will set new highs in the next six months, baring a major economic or political surprise, being invested in the right areas will be the key to out performance.
Further help from the FED is unlikely at this stage in the cycle. We do expect more growth in GDP in 2016 in the U.S. and globally.
Please
feel free to comment or contact us with any questions.
Doug
Coppola
John
Coppola
Nov
5, 2015
Communication is for
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CFA does not accept any responsibility or liability arising from the
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information presented is accurate, current or complete, and such
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