One hundred and sixteen stocks hit new highs yesterday…
The Dow was up and the Nasdaq was down. Gold traded at $1667.80 per ounce. You could have bought silver for $31.05. And it would have cost you $93.97 for 42 gallons of light, sweet crude.
In Japan, the Nikkei was at 10, 801 and is looking almost bullish.
The Malaysia MSCI index is hitting all-time highs.
The Mexican ETF (NYSE: EWW) just broke out and is off to the races. I’ve said it before and I’ll say it again: Put some money in Mexico.
Second Breakfast
I had brunch with my parents this weekend. My father is of the age where he has to start drawing down his 401(k).
In case you don’t know, at age 70 ½ you are required to start taking withdrawals — or face stiff penalties. This is so the IRS can get its cut. This is true of most retirement accounts (IRAs, 403b, 457b), with the exception of a Roth IRA, as you paid your taxes on that when you earned it.
Anyway, Dad has to pull 5% out of his IRA this year. He wanted to know when he should do this.
Knowing I get questions like this from time to time, I pulled out my travel-sized crystal ball and looked deep into its murky essence…
“Look at the S&P,” it whispered.
The S&P 500 is a stock market index based on the common stock prices of the 500 top publicly-traded American companies as determined by Standard & Poor.
It is the best representation of what American companies are doing now and what they did in the past (the Dow Jones Industrial Average is too small, and its constant rejiggering makes it suspect for use as an historical data set; the NASDAQ 100 is tech heavy).
Below is the chart of the S&P 500 Index going back to 1993.
Each candlestick represents a quarter (that’s three months for those of you in the cheap seats). Candlesticks are those red and white things: white means the quarter ended up, red down.
The thin vertical lines show intra-period trade, and the candlestick body shows the open and close:
I find this chart absolutely amazing…
Look at that bear market from 2007 to 2009: The index went down for a full year and a half — six straight quarters.
And in 1995, the market more than tripled over five years.
Right now the S&P 500 is almost back to its all-time highs. It is at a five-year high after rising 13% last year and another 3.2% this January. Its all-time high was 1,565.15 on October 9, 2007. We are 63 points away from that record, or 6.3%.
It has a good shot to get there this quarter.
Measuring Value
The current price-to-earnings ratio (P/E) of the S&P 500 is 16.71.
Price-to-earnings is a time-honored metric of value. The rule of thumb is if you buy a private company, like a gas station, you generally pay five times earnings. In this way, you can make your money back in five years.
The P/E ratio is a simple if blunt instrument. All things being equal, low P/Es are better than high ones.
The stock market rarely dips to low single-digit levels, but when it does — like it did in 1980 — you should go all in.
For comparison, the mean P/E for the S&P 500 is 15.48, the median is 14.49, the low was 5.31 (Dec. 1917), and the high was 123.79 (May 2009).
It should be noted that in 2009 at the full height of the crisis, earnings fell faster than price: Earnings for the S&P 500 for Q4 2008 were a negative $23.25. This was a record.
Back to the Future
The estimated forward P/E ratio is 13, based on last week’s close and a forward EPS estimate of $112.95. This is the highest EPS ever. That said, earnings growth is flat and expected to be 1.5% in 2013.
The takeaway from this data: The market is slightly overvalued in terms of historical P/E with a market cap of $9.8 trillion — but will be undervalued a year from now if the EPS growth trend continues. The index chart tells us we have 6.3% upside before it runs into resistance.
The political situation with the debt talks looming would suggest the market sells off before the fight and ramps up afterwards in a relief rally. (The one thing I’m sure of is Congress and the president like to spend money and will somehow find a way.)
If you are in my father’s position and have to sell 5% of your 401(k) this year, I would recommend you sell 1/3 today, 1/3 during the post-debt ceiling relief rally, and 1/3 in October.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
