As the 4th quarter, 2012 winds down and with all eyes focused on Washington, it has been a better year for stock and bond returns than many expected. The S&P 500 is up roughly 15% – 16% year-to-date, and the Lehman Aggregate will end the year with an increase of 4% – 5% (approximately).
In terms of S&P 500 (and per ThomsonReuters), the “forward 4-quarter” estimate for S&P 500 earnings is now $108.91, down slightly from last week’s $109.09, and towards the lower end of the 3-month range of $107.89 from Sept 28th, and $112 from October 5th. This pattern is typical of how earnings estimates “evolve” during a quarter. The forward estimate tends to get revised downward through the quarter, and then we will see a nice “pop” in that forward estimate as we roll into the first week of January, as the old quarter rolls off and we add the next forward quarter to the estimate.
With 3rd quarter, 2012 financial results all but reported (497 of 500 companies have reported their 3rd quarter, 2012 results already), the calendar 2012 earnings estimate for the S&P 500 is $101.38 as reported by ThomsonReuters (7 estimates), and I would expect that to drift a little higher as the 3rd quarter results are finalized, and the 4th quarter starts getting reported in early January.
Thus, the S&P 500 is trading at 13(x) those forward earnings expectations.
Last week, Jeff Miller, the erudite blogger who authors “A Dash of Insight” every week called me out on my comment that I thought the S&P 500 was “fairly valued”.
When I look at S&P 500 earnings growth expectations for this year and 2013, year-over-year growth for S&P 500 earnings is expected at 4% in 2012, and 10% in 2013, and if you average the two you arrive at 7%. A 13(x) multiple on the S&P 500 currently is roughly 2(x) the average growth rate of the two years, so on a P.E-to-growth basis, the S&P 500 is thought by some to be “fairly valued”.
As a smart lawyer once said, “I can argue it either way”, but like a lot of folks in this business, I tend to think the risk / reward in terms of asset allocation is more favorable to stocks (more reward) than bonds (more risk).
This article from Brian Wesbury, First Trust’s excellent resident economist from November 5th, 2012 makes a compelling case for the US stock market.
The Washington discussions have thrown a temporary wrench into market forecasts and have resulted in economic predictions ranging from Armegeddon to cautious optimism. I hear a lot of recession talk about 2013 that guys like Jeff Miller and Doug Short have shot considerable holes into over the last 12 months, starting with the August, 2011 market selling.
Even though I don’t personally agree with the tenor of the discussions coming out of Washington regarding higher taxes, I just don't think 2013 will be that bad, unless the President really loses all perspective about America and Americans, and their willingness and ability to want to get out of bed each day and control their own destiny economically.
Ultimately, I think there will be a reasonable compromise from Washington and the taxation issue, and Americans will get about “the business of business” in 2013.
Each week, in this opening section, we like to leave readers with a “stat (or stats) of the week” and this week we look at equity market returns across the various market cap ranges and investment styles. What struck me is that this has been a fairly unform year for most equity investors, even as money continues to flow out of actively managed equity funds: (Source: JP Morgan’s Weekly Market Recap as of 12/17/12)
Large-cap Value +16.2%
Large-cap Blend +14.9%
Large-Cap Growth + 14.1%
Mid-Cap Value +16.5%
Mid-Cap Blend +15.3%
Mid-Cap Growth +13.9%
Small-Cap Value +14.2%
Small-Cap Blend +12.7%
Small-Cap Growth +11.2%
From the data, I would attribute a slight edge to larger-cap and a slight edge to “value” over “growth”. The biggest return disparity is between small-cap growth and large-cap value, which is a 5% difference. (I wonder how much of that disparity is Apple (AAPL) ? (long AAPL).
Sector / Security / Market comments:
* Muni’s had a tough week – the Municipal Bond ETF (MUB) looks to be in the early stages of a breakdown (see chart below). Note the “double-top” in the chart from February and then late November. We have sold all of our muni exposure and have left the proceeds in a municipal money market waiting to see what happens. It could be interest-rate related, but I suspect that the tax-exemption that favors municipal bonds might be on the table in 2013 as Washington looks for additional revenue. Here is our update from November 17th that details our early comment on munis.
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