Corporate profits are headed for a record high this year; according to a survey by Bloomberg News, profits for the S&P 500 are expected to reach $104.78 per share. That would mean that profits had increased by a stunning 125 percent since the beginning of 2009. The incredible speed with which they're growing may explain why stocks have failed to keep pace.
The price/earnings ratio for the S&P 500 as a whole is now at 13.7. The historic mean for that number, figured since 1954, is 16.4, which the S&P has traded below ever since May 13, 2010, the day of the infamous "flash crash." That's 446 consecutive days in which stocks have been trading below their historic norms, the longest such stretch we've had since 1986.
There seem to be two primary explanations for this phenomenon. One: Investors haven't really processed the growth in corporate profits yet, so they haven't yet incorporated that information into stock pricing. Two: Investors don't really trust this economy or this market, at least not yet. It's probably a bit of both.
Tuesday, January 31, 2012
Monday, January 30, 2012
Looking Back at the Fourth Quarter
On Friday, the Bureau of Economic Analysis released its first estimate of growth for the fourth quarter of 2011, and the news was good but not great: GDP increased at 2.8 percent. That's up from the 1.8 percent growth we had in the third quarter, and the highest quarterly figure we've seen since the second quarter of 2010. It also meant, though, that for the entire year, GDP growth was 1.7 percent, which is fairly anemic.
The concern over that fourth-quarter number - aside from the fact that everyone would like to see it be a little bit higher - is that much of the growth came from increases in inventories. If you subtract inventory growth from overall GDP growth, you see that the real growth in sales was just 0.8 percent in the fourth quarter.
The most positive way to look at the fourth quarter is to separate the figure into public and private sector growth. While government continues to shrink, the private sector actually grew at a robust 4.7 percent for the quarter. That's a sign of real strength for this economy.
The concern over that fourth-quarter number - aside from the fact that everyone would like to see it be a little bit higher - is that much of the growth came from increases in inventories. If you subtract inventory growth from overall GDP growth, you see that the real growth in sales was just 0.8 percent in the fourth quarter.
The most positive way to look at the fourth quarter is to separate the figure into public and private sector growth. While government continues to shrink, the private sector actually grew at a robust 4.7 percent for the quarter. That's a sign of real strength for this economy.
Friday, January 27, 2012
Like Night and Day
Most of the buying and selling of stocks takes place over the course of Wall Street's trading day, but there are also purchases that occur outside of normal business hours. The Bespoke Investment Group has been looking at the difference in the markets between after-hours trades and the normal trading day, and found something fascinating has been going on.
Bespoke looked at the price moves for the SPY ETF, which tracks the S&P 500. Over the past 50 days, they found, SPY has gained about 6 percent. But during regular trading hours, that same ETF has declined, at an average loss of 0.06 percent per day. It's only in after-hours trading that the issue has gained, with an average increase of 0.20 percent per day.
That's a pretty dramatic shift. Is there any significance to it? The folks at Bespoke don't attach any greater meaning to it, so it may simply be an instance of the markets working in mysterious ways.
Bespoke looked at the price moves for the SPY ETF, which tracks the S&P 500. Over the past 50 days, they found, SPY has gained about 6 percent. But during regular trading hours, that same ETF has declined, at an average loss of 0.06 percent per day. It's only in after-hours trading that the issue has gained, with an average increase of 0.20 percent per day.
That's a pretty dramatic shift. Is there any significance to it? The folks at Bespoke don't attach any greater meaning to it, so it may simply be an instance of the markets working in mysterious ways.
Thursday, January 26, 2012
Big Apple
Apple is one of the two largest American corporations by market capitalization - depending on the day, it either leads or trails ExxonMobil- but even that momentous fact may understate its impact on our economy. As you probably know, on Tuesday the electronics behemoth announced record-breaking profits for the fourth quarter of 2011: Its more than $13 billion in net earnings was not only the largest ever for Apple, but the second-largest ever by any American corporation. (Exxon reported a larger quarterly profit back in 2008.)
That growth was enough to catapult the earnings for the entire S&P 500 into the black. Prior to Apple's earnings report, earnings for the S&P 500 as a whole were down 4.2 percent in the fourth quarter. But after Apple's report, the net for the entire S&P 500 is now up 4.4 percent.
Apple not only doubled its profits from the year earlier, it beat the analysts' estimates by a whopping $7 billion, which is also a record. For all that, Apple's share price rose 6 percent in trading yesterday, reaching a record high of $454.45.
That growth was enough to catapult the earnings for the entire S&P 500 into the black. Prior to Apple's earnings report, earnings for the S&P 500 as a whole were down 4.2 percent in the fourth quarter. But after Apple's report, the net for the entire S&P 500 is now up 4.4 percent.
Apple not only doubled its profits from the year earlier, it beat the analysts' estimates by a whopping $7 billion, which is also a record. For all that, Apple's share price rose 6 percent in trading yesterday, reaching a record high of $454.45.
Wednesday, January 25, 2012
An Aging America
The good news is that we're all living longer. If you're age 65 and healthy today, you've got a 40 percent chance of making it into your 90s. One result of this is that we're about to see a population full of older folks: According to a study from the Aite Group, by 2050, there will be 88.5 million Americans aged 65 or older. By contrast, in 2000, there were only 35 million senior citizens.
The downside of all that is that we're all going to need a lot more health care. Today's 65-year-old married couple will need $230,000 to pay for medical expenses throughout retirement, not including nursing home care. Six in ten men and eight in ten women will end up needing chronic care.
There's no doubt about it: getting older is never easy. The tradeoff we make for those extra years is the extra medical costs associated with them. If you're concerned about how you're going to pay for all those additional costs over your retirement years, feel free to give me a call.
The downside of all that is that we're all going to need a lot more health care. Today's 65-year-old married couple will need $230,000 to pay for medical expenses throughout retirement, not including nursing home care. Six in ten men and eight in ten women will end up needing chronic care.
There's no doubt about it: getting older is never easy. The tradeoff we make for those extra years is the extra medical costs associated with them. If you're concerned about how you're going to pay for all those additional costs over your retirement years, feel free to give me a call.
Tuesday, January 24, 2012
Forecasting the Fed
The Federal Reserve's new policy of projecting when it will raise interest rates, which we discussed here a few weeks ago, gets its first trial tomorrow. At the close of the Fed's two-day policy meeting, they are scheduled to release a forecast for when it will raise the benchmark Fed Funds rate, which has been near zero for a couple of years now.
In somewhat of an attempt to steal the Fed's thunder, Reuters released the results of a poll of Wall Street economists on when they expect interest rates to rise. The consensus answer was that we should see an increase sometime in the first half of 2014. That's a pretty safe prediction, considering the Fed has already said it will keep interest rates right where they are until at least the middle 0f 2013.
What will be interesting will be to see if the Fed's forecast matches that of the Wall Streeters. And if they differ, whose prediction will turn out to be more accurate? We won't know that answer for a long time, but there's not much reason to think that the Fed will anticipate economic conditions any better than the top economists on the Street.
In somewhat of an attempt to steal the Fed's thunder, Reuters released the results of a poll of Wall Street economists on when they expect interest rates to rise. The consensus answer was that we should see an increase sometime in the first half of 2014. That's a pretty safe prediction, considering the Fed has already said it will keep interest rates right where they are until at least the middle 0f 2013.
What will be interesting will be to see if the Fed's forecast matches that of the Wall Streeters. And if they differ, whose prediction will turn out to be more accurate? We won't know that answer for a long time, but there's not much reason to think that the Fed will anticipate economic conditions any better than the top economists on the Street.
Monday, January 23, 2012
Effects of the European Downgrade
One piece of seemingly significant recent economic news was the report from Standard & Poor's downgrading the debt of France, Austria, Italy and Spain, as well as five smaller European nations, in response to the much-chronicled fiscal woes Europe is facing. Italy and Spain actually had their credit rating docked two notches, which should theoretically mean that they have to pay more interest to get investors to buy their debt. But since the day of the downgrade, the yield on 10-year Italian bonds has dropped from 6.64 percent to 6.34 percent.
The same thing happened when S&P downgraded the United States' creditworthiness last August. At the time, the U.S. was paying 2.56 percent interest on its 10-year Treasury bonds; since then, it's dropped to around 2 percent. In the same time frame, the S&P 500 stock index has gained 9 percent.
This isn't a new phenomenon. Back in 1998, Japan was downgraded by Moody's, and Japanese stocks gained 26 percent over the following year. Canada was downgraded in 1992, and Canadian stocks then gained 30 percent over the following year. That doesn't mean credit downgrades are meaningless, but it does suggest that you shouldn't necessarily expect to see their effects in the markets.
The same thing happened when S&P downgraded the United States' creditworthiness last August. At the time, the U.S. was paying 2.56 percent interest on its 10-year Treasury bonds; since then, it's dropped to around 2 percent. In the same time frame, the S&P 500 stock index has gained 9 percent.
This isn't a new phenomenon. Back in 1998, Japan was downgraded by Moody's, and Japanese stocks gained 26 percent over the following year. Canada was downgraded in 1992, and Canadian stocks then gained 30 percent over the following year. That doesn't mean credit downgrades are meaningless, but it does suggest that you shouldn't necessarily expect to see their effects in the markets.
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