The major equity indices continue to explore new highs, as illustrated by the graph of the S&P500 Index shown above. While individual stocks may get hammered by bad luck or bad management, the averages climb upwards. The question: can it go on indefinitely?
Caution does seem to be in order. Stock values tend to be a function of interest rates, earnings and technical demand. Interest rates are low, and are likely to climb sooner or later, which will depress valuations. Earnings fluctuate wildly with the vagaries of the business cycle, and are harder to evaluate. Doug Short takes a look at historical earnings in an interesting piece up at Advisor Perspectives. He looks at the P/E10 ratio of the S&P 500 Composite (an index derived from the S&P500 which encompasses more historical data; the original index was not created until 1957). The P/E10 ratio calculates the ratio of monthly stock prices to 10 year average earnings. This takes out statistical noise caused by trading volatility and severe market disruptions.
The historical P/E10 norm for the S&P Composite is 16.5, while the current figure is 22.5. The present number is not as worrisome as the 32.6 of 1929 or the 44.2 at the peak of the 1990’s dot-com bubble, but it is high. It has come back a long way from the 13.3 figure of 2009, and the economic recovery behind that rise is not robust. Interest rates are artificially low, unemployment is high and a good deal of economic activity is being made possible by deficit spending that is not sustainable.
Technical demand can support and even boost the level of stock prices. Simply put, this means people will continue to invest in stocks because they want to invest in stocks and believe prices will rise, pushing up demand and thus prices. In other words, the classic self-fulfilling prophesy. Technical analysts have a labyrinth of graphs and mathematical models to analyze these trends. Technical factors are driven by market psychology and thus human nature. When perceptions change, market corrections can occur in a hurry and become more closely aligned to economic reality. A bull market dependent on technical factors is a very unstable thing. Caveat emptor, caveat investor!
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Townhall Finance – With interest rates near 0% and traditional income investments like savings accounts and certificates of deposits (CDs) earning next to nothing, blue chip telecom stocks like AT&T (NYSE: T) and Verizon (NYSE: VZ) have become wildly popular.
That makes sense. Telecom is a “recession-proof” industry. Regardless of what’s happening with the economy, people will still need cell phones and cable TV. And with both stocks yielding close to 4.5%, both companies look like a good choice for income investors in search of high yields.
But there’s a problem. As with a lot of American blue chips, these stocks look expensive right now. AT&T and Verizon sport P/E ratios of 16 and 20, respectively — well above the S&P 500s historical average of 15.
And while a 4.5% dividend yield might seem like a lot, in the telecom industry, you can find much higher yields… and at a much better price.
For example, I’ve found a telecom that’s currently yielding 8.4%. It enjoys the same competitive advantages as both AT&T & Verizon, and better yet… it’s trading at a P/E ratio of 10.5 — making it a much better value than AT&T or Verizon.
But you’ve probably never considered this company. In fact, I doubt you’ve ever heard of it.
That’s because the company — Telefonica Brazil (NYSE: VIV) — isn’t based in the United States. But before you dismiss this as just another “risky foreign stock,” hear me out…
As one of two Brazilian fixed-line operators, Telefonica Brazil is one of the largest players in the business. The company has 11 million fixed-line clients, 3.5 million broadband users and 680,000 pay-TV subscribers.
Fox Business – As if investing in a post-financial-collapse world isn’t hard enough, consider the latest worry the markets will have to deal with in the coming weeks: The outcome of the presidential election.
This year’s contest, like most others, hinges on the economy — or to be more precise, how to make it grow faster than it has grown over the past four years. Both President Obama and his Republican challenger, Mitt Romney, offer differing visions to meet that goal, and both visions offer opportunities for investors.
Larry McDonald, the senior policy strategist for the investment firm NewEdge, came up with three portfolios for investors to look at depending on who wins the election. (McDonald will appear live on the FOX Business network Monday at 1:20 p.m. ET.)
First, a couple of caveats: These are not recommendations to buy particular stocks, since investing in specific companies requires more precise research. Nor do they take into account every political scenario such as a complete change in the current makeup of the House of Representatives, the Senate or both. And the portfolios assume no substantive change in Federal Reserve interest-rate policy at least for the next year.
WSJ – When it comes to expecting stocks to provide them with any kind of decent return, many investors are throwing in the towel. After all, it’s been years of back-and-forth swings in their portfolios.
Meanwhile, the double-digit returns on bonds over the last 25 years have investors piling into fixed-income investments in record numbers—even as many money managers and analysts warn that investors shouldn’t expect those kinds of returns to continue.
It’s an especially confounding time to be sketching out expected returns on a portfolio, with both stock and bond markets buffeted by significant and unusual forces that could play out for many years to come.
A Grim Five Years
The outlook for stocks stretching out for the next five years or more would seem to be grim, thanks to entrenched fiscal and economic woes in the U.S., Europe and Japan. The U.S., for one, continues battling stubbornly high unemployment and the lingering effects of the housing collapse.
At the same time, some argue that the Federal Reserve’s unprecedented efforts to pump money into the financial markets will eventually lead to a flare-up in inflation. That would send interest rates higher and lead to a nasty bear market for bonds.
Market-observers have grown fond of declaring that investors can count on one thing, that uncertainty is the only certainty.
That is, of course, not entirely true. Worth noting: Markets will open tomorrow, and investors will still be there. (Whether bids outnumber offers is a question best left until the Greeks finish voting.) It is, though, never good to go unprepared. Here are four stocks we are watching as the Greek drama goes from the soccer pitch to the polls—and two stocks Barron‘s sees as buys:
How do you say Big Mac in French? Or Spanish? Romanian? Sensible questions, given how important the continent is to McDonald’s. Europe was the largest source of growth for the world’s largest fast-food chain last year: Sales at locations open at least a year rose 5.9%, more than the 4.7% growth seen in the Asia-Pacific region. All told, Europe represents some 40% of all the company’s operating income. More
As the Dow posted its sixth straight loss on Wednesday — thanks to new worries out of Europe — we asked the pros what you should do now.
Investing pros have been nudging Americans to invest in foreign stocks for years, but now some are shifting their model portfolios back to favoring domestic ones. The reason: The U.S. economy is still growing (albeit slowly), while much of Europe is slipping into recession. Indeed, fresh reports this week that Greece and other euro-zone countries may derail the economic recovery has further jacked up the investor anxiety — and has pushed the Dow down the past six straight days. Meanwhile, even big emerging markets appear to be losing some steam. “China and Europe are both looking a little shaky,” says Sidney Blum, a financial planner at GreatLight Fee Only Advisors in Evanston, Ill, who expects U.S. markets will outpace foreign markets over the next year. More