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Monday, March 10, 2014

Is the Bull Market for Stocks Over?

The market is less than 1% below the all-time high it set last week.  The question on everyone's mind "Is the Market Overvalued and Can it go higher?"
More S&P500 Charts & Market Scan
Last week on March 6, 2014, Liz Ann Sonders of Charles Schwab, Inc. posted this video titled "Market Snapshot: Bull Rally - Is It Sustainable?" where she makes many of the same points I've written about in my newsletters (which newsletter is best for you.)  Below are the highlights of the Liz Ann Sonders slides that I think are especially important.
See slide 14 of for this table:
Market Return after a Great (+25%) Up Year
2014 is a "Midterm Election Year."  The average market correction between 1962 and 2010 was 19% but the performance of the market a year after the bottom of the correction was 32% higher. See slide 15 of for this table:
Note how the average "correction" during mid-term election years back to 1962 is 19% but  the market was up 32% from the low just a year later.  I've taken profits and have ammo to buy if we get this pull-back. See slide 17 of for this table showing Rising 10-year Treasury yields are good for stocks.  
Note how the average change for the S&P500 while rates are rising is 17.6% with 100% of the time the markets went up.   On the flip-side, when rates were falling, the average change for the S&P500 was a loss of 1.9% with the market going up only 50% of the time. See slide 19 of for this table showing "Inflation vs PE (Price-to-earnings) ratio":
In March 2014 issue of "Kirk Lindstrom's Investment Letter" (on page 7) I wrote:
The estimates for 2015 earnings are in and they show good growth over 2014. See page 10 for a summary.  Now, based on 2014 PE or PEG, the market does not look over valued.   The 32% gain last year may have correctly anticipated the higher earnings, especially with estimates for 2015 showing similar earnings growth.      We could see PE expansion for further gains as money moves from bond funds to stocks but I do not count on this.  Based on the Fed Model, the market is not “overvalued” based on 2013 or 2014 GAAP earnings estimates and current interest rates.  

From page 10:

2011 GAAP EPS =  $86.95 
2012 GAAP EPS =  $86.51 
2013 GAAP EPS (Top Down Est.) =  $100.78
2014 GAAP EPS (Top Down Est.) =  $120.60 
2015 GAAP EPS (Top Down Est.) =  $147.50 
Some quick calculations of PE times GAAP EPS:
16.3 x $120.60 = $1,966 
16.3 x $147.50 = $2,404  
Note GAAP EPS = Generally Accepted Accounting Principles Earnings Per Share

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