Volume XVII, Issue 2
Second Quarter, 2012
Partly Cloudy
O
ver the last few years, the Even so, recent valuations suggest situation. Although the most
early going for the equity that there is plenty of room for desirable route would be negotimarkets has been strong, fol- further upward movement without ation, there have been no indilowed by unsettling weakness triggering concern about excessive cations that this option is on
during the warmer months. enthusiasm. This is hardly a re- the table.
The alternative
Data collected over extended play of the turn of the millenni- would be a military strike on
periods confirm that stocks um.
the facilities involved, hardly a
tend to be strongest during the
Yes, there is a flipside to this palatable thought for an Amerifirst and fourth calendar quar- equation. Aside from the ongoing can public that has become so
ters of the year and markedly noise from the campaign trail and fatigued from the less than proless encouraging during the the laundry list of promises being ductive involvements in the
spring and summer
Middle East over
months. Yet, what “. . . stocks tend to be strongest during the past decade.
seems axiomatic
Let’s not forget
from a long-term the first and fourth calendar quarters N o r t h
Korea,
perspective is hardly of the year. Yet, what seems axiomatic which has been
a prescription to be
unusually quiet
from
a
long-term
perspective
is
hardly
a
followed every year.
while the reins of
Whether trading prescription to be followed blindly.”
power
have
in the coming quarchanged hands, yet
ters will follow the historical offered by the candidates, the once again Pyongyang is rattling
path remains to be seen. There more pressing matter is the contin- its sabers with further missile
are a number of reasons why it uing saga of Iran and its nuclear testing. Even so, Iran poses the
may not. On the plus side of intentions. Given the barrage of bigger threat.
Source: Stockcharts.com
the ledger is continuing expan- hostile tirades from Teheran and
If the pot does indeed boil
sion of the job market, which its determination to move ahead over and some action is taken
has provided a substantial, but in this area, one would be hard- to blunt the Iranian challenge,
hardly complete, reversal of the pressed not to be concerned that there is little doubt that the inimassive erosion of several years the regime’s objective is unfriend- tial reaction of the investment
go. Along with a brightening ly. The possibility that Iran will markets would be negative. But
in the employment figures is develop the bomb as well as a de- the reality is that some bogeythe likelihood that interest livery system is, in most quarters, man is always lurking and yet
rates will stay at subterranean considered absolutely unaccepta- somehow the world has manlevels for at least 12 to 18 ble. For that reason, both the U.S. aged to deal with it and move
months or more
What’s and Israeli governments have de- on. Despite the lengthy list of
more, corporate profits are voted considerable time to evaluat- global traumas encountered
continuing to expand, though ing the options that would be in- over the last 100 years, the marperhaps at a moderating pace. volved in attempting to defuse the kets have always recovered and
climbed to new high ground.
There is no reason to believe
that it will be different this time
around. In any case, attempts
to game the possibilities will
probably prove to be fruitless.
What will probably be more
productive is an assessment of
the upside possibilities. That
begins with an estimate of current-year earnings for the
S&P500, which seem likely to
be in the area of $105.00, up
from $96.44 in 2011. That estimate, along with a multiple of
15 times, which is in line with
historic norms, would put the
index at 1575. That’s 11%
above the end-of-March level,
which itself was a 12% gain
from year-end 2011.
It could be even better. A
multiple of 15 assumes a normal level of interest rates. Priceearnings multiples, however,
tend to be inversely correlated
with interest rates. So the lower
the rates, the higher the multiple. Given the historically low
interest rates that continue to
prevail, it would not be unrea-
sonable to look for a multiple of
18 to 19 times, which would
boost the S&P index up into the
range of 1800 to 1900. At those
levels, we would be looking at a
further gain of 30% or more.
Is that likely? Probably not,
but history shows a number of
annual gains above 30%. The
difference now is that such an
advance could take place without
leading to excessive underlying
valuations. The latter was what
happened a dozen years ago, but
the situation is quite different
now.
Considering the prospects for
a wide range of asset classes, this
appears to be the time when equities should be shining. Valuations are low while profits continue to climb handsomely. Corporate America is lean and mean,
which brings a hefty chunk of the
top lines down to earnings.
For the moment, equities
appear to be the best game in
town. Even so, air pockets, or
worse, invariably prompt periodic
agita, an unpleasant side effect of
the equity equation. Over time,
returns from equities tend to
be at the upper end of the
scale, but bumps along the way
are inevitable.
Prospects for the other
asset classes are mixed, at best.
The fixed-income universe is
staring at the likelihood of rising interest rates over the next
few years. So yields may climb,
but principal values will erode,
increasingly so for longer maturities.
Real estate, particularly in
the residential area, may prove
to be more promising. Home
prices across the continent
have plummeted and mortgage
rates remain historically low.
The hitch is that the banks are
still reluctant to lend, which is
one reason why we have yet to
see a substantial upturn. At
some point, however, that will
happen.
Precious metals? Following the latest major advance,
expect an extended period of
moving sideways, unless global
tensions increase.
N. Russell Wayne, CFP®
Key Market Indicators: First-Quarter, 2012
Indicator
Represents
Total Return
Dow-Jones Industrial Average
30 Bellwether Companies
8.1%
Standard & Poor’s 500 Index
Largest Companies
12.0%
Russell 2000 Index
Small Companies
12.1%
Value Line Index
Actively Traded Companies
13.7%
Barclays Aggregate Bond Index
U.S. Investment Grade Bonds
0.1%
www.soundasset.com