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December 2018 Newsletter - This too shall pass

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No doubt about it, 2018 has been a rough year on the equity markets.  It hasn’t been great for bonds either.  Here are the facts as of December 20, 2018.  These are all Year-to-Date figures.

 

 

Even though we have had a full ten-year run, it still hurts.  However…

 

We are of the opinion that this recent correction is coming to an end and that smoother sailing could well be ahead.

 

As you have no doubt heard us say countless times, you don’t make investment decisions based on emotions, you make them of facts and data.   Currently there is lots of fear out there.  As Warren Buffet wisely says:  Be greedy when others are fearful and fearful when others are greedy. 

 

We are positive for the following reasons: 

 

Earnings and Earnings Growth

 

Simply put, you could look at the index price as the price of “one share” of the S&P 500.  The earnings value would be what you would be paid on that one share.  In other words, earnings represent a gauge of corporate profitability and Price to Earnings (PE) represents a measure of value.  Lower PE values mean the shares are relatively cheap, higher values mean they are expensive.

 

The chart below shows that 2018 earnings on the S&P 500 is about $157 “per share”. The column on the left show’s different hypothetical values for the Index Level.  As you can see, if you are getting paid $157 then you can also see the lower the index value, the cheaper the price according to the PE multiple.

 

You can also see that the consensus earnings estimate for 2019 is higher.  $170 in fact.  At that level an index value of 2,500 (the S&P range at the moment) represents a PE multiple of 14.7x i.e. cheaper.

 

Overbought vs Oversold

 

Another “tecky” measure to watch is called the Relative Strength Indicator or RSI.  It is a number between 1 and 100 and is based on the relative strength of gains and losses of the market over a specified period.  Anything over 70 is considered to be over bought.  A number under 30 is considered to be over sold. At time of writing, the RSI is currently 27.

 

The Takeaway

 

If you take these figures from above: namely strength of earnings, lower relative values and oversold markets, in our view, at some point soon the brakes will be thrown on this market correction and buyers will come back into the market.

 

That doesn’t alleviate the hurt in the short term but at some point, it will inevitably get better.

Again and as always if you are worried and want to talk about it in more detail, we are here to help.