Seeking Alpha - 1 day agoI know some people will view this article as a sure sign that the top is in. Keep in mind, however, that I have been a raging bull since July 2009 ...
For the past 4 years now the general public has missed huge gains in the market because of their own bias clouding objective thinking and because of the excessive fear spread by bloggers and the media alike. From Porter Stansberry's ridiculous calls for the End of America to Bob Prechter's ongoing claims of imminent collapses in the market to the latest diatribe from Marc Faber about how the markets have peaked (didn't he say that in 2009, 2010, 2011, and 2012?), the general investing public has been bombarded by these seemingly eloquent and smart "gurus" whose short thesis is so well thought out and convincing. As Laszlo Birinyi often says, the "short thesis is always the more articulate one". But facts are facts. And speaking of them, let's look at the facts.
Historical S&P Data
Take a look at the data below, which includes the earnings yield, dividend yield, price of the S&P 500 at the end of the year, S&P 500 earnings, and dividends for the past 53 years.
In looking closer at this data to get a sense of where we currently stand as compared to historical averages, I examined the price to earnings ratios and earnings yields for the above period. In order to exclude anomalies or outliers, I excluded the top and bottom five years of P/E ratios and earnings yields. So for example, I excluded 1997 through 2001 in my calculation of average P/E because they tended to skew the data upward and likewise I excluded 1974, 1977-1979, 1981 because they tended to skew the data downward. In doing this I think I can get a truer sense of what an average multiple is.
As you can see in the data below, using the current S&P price of 1,510 and estimated earnings of 102.47, I arrived at a current P/E ratio of 14.74 and an earnings yield of 6.79%. After excluding the outlying years, the averages for both are 15.92 and 6.57%, respectively. Highlighted in yellow is the current ratio and highlighted in red is where the average ratio stands.
So you can see that we're currently slightly below average P/E ratios and slightly above average Earnings Yields. To get to the average of either we would see upside of 3% to 8%. Not exactly a cause for celebration right? I agree, on paper.
What about Sentiment?
Let's look closer at the sentiment of people as this is what drives what people are willing to pay for stocks. The more optimistic people are about things, the higher the market's price to earnings ratio is and the lower its earnings yield is. The media has been pushing the latest news from AAII surveys and Bank of America's (BAC) proprietary Bull & Bear Index which both suggest that investors are extremely bullish and indicate that it is a sign of an imminent top. I'm sorry but I completely disagree. I have been getting asked a lot recently how it is that the stock market can be doing so well when the economy sucks so badly. What this tells me is two things: (1) the average person is probably not heavily invested in the markets and (2) the average person doesn't believe the economy is improving.
I believe this sentiment stems from a few things:
(1) As mentioned above, the constant bombardment of bad news by the media. We all know that the media is in the business of making stories and what sells better than bad fear and panic?
end quote from:I wasn't able to quote the second page here but if you want to click on "Sorry Bears,----" above to go there.However, I do believe that the best time to invest was when the market was at around 7000 a few years ago, because now it is at 14,000. Those that reinvested then have made out pretty good. You really can't earn enough interest in banks to even beat inflation right now. But you can almost be assured you will beat inflation by investing in Blue chip stocks with high dividends. So, be sure to number crunch for yourselves before you invest in anything.
However, then there is the Sequester and how it will affect the market which might become an issue.
But, in regard to the sequester it will only be as effective as the voters let it be. If voters scream to their congresspeople, those parts of the sequester won't stand. Otherwise, Congresspeople won't be re-elected. So, the sequester depends upon how upset groups of people become about almost anything.
As a result of this as the pain spreads around I think in the end in might not affect the stock market much, but it might affect about 1,000,000 people who either lose their jobs temporarily or permanently or lose 20% of their income by losing one day a weeks work. This could affect the market as those 1,000,000 people (and all their families) buy less. So this is something to think about too. An average of 2 million to 4 million in the families buying less products might change a lot of things, especially in communities and states that have a large portion of their economies based upon government employees.