A New Worry for Stock Market Bulls

E.S. Browning's piece($) that sits atop Page 1 of the Money and Investing section of the Wall Street Journal details the possibilities for equity markets this fall, offering the handy scorecard shown below along with some thoughts for both bulls and bears, however, for some reason, the bears have to turn the page to hear their case.
And, in this particular situation, that may be a bit more difficult than usual since those with a dour outlook for stocks, now entering the most dangerous months of the year for equity markets, have to get past the outlook offered up by Ms. Liz Ann Sonders of Charles Schwab who cites a new worry for the bulls.

To wit:

Liz Ann Sonders, chief investment strategist at Charles Schwab, thinks even optimists could be underestimating the market's potential. "I worry that what looks more and more like a V-shaped recovery is even stronger than my optimistic expectations," she told clients.

Well, of all the worries facing investors today amid the turmoil in financial markets, we've now got that one to add to the list...

But, seriously, anyone reading this story just knew that views opposing what appeared on page one will eventually turn up, and they do:

How could anyone argue with that? The pessimists have reasons. At the risk of disagreeing with Milton Friedman, many, including the Fed, warn that future economic growth could be soft, especially once government stimulus wanes. Some even fear that after growing again later this year, the economy could drop back into recession in 2010.

Smaller businesses are having trouble getting loans and regional banks are struggling, says University of Maryland economist Peter Morici. "Cash flow, credit and collapse could be the bywords of 2010 as smaller businesses and banks continue to fail and the recession takes a second dip," he says.

One huge concern is continued weakness in consumer spending. Although consumer debt has begun declining as a percentage of disposable income, it remains far above past levels. At the end of this year's first quarter, consumer debt stood just under 124% of disposable income, Federal Reserve data indicate. That was down somewhat from 131.5% at the end of 2007, but far above the 90% level of early 1999, or the 61% level of 1984.

Yes, it all comes down to the consumer, a no-show so far in the current recovery, whatever letter is used to describe its shape - "V", "W", "L", "U", or, my favorite "Z".

Comments

[enigmaman:]

You said" Yes, it all comes down to the consumer, a no-show so far in the current recovery, whatever letter is used to describe its shape - "V", "W", "L", "U", or, my favorite "Z""
Speaking as one of those "consumers" I will have to agree that Consumer Frugality is the new long term trend, even though its clear that our economy as well as many of the worlds depend on the American consumer we have many saying the opposite to justify their economic theories, well we will just have to wait and see wont we, yesterdays report that consumers credit plummeted 21.6 billion in just June is a wake up call to the market " Consumer has gone fishing" and then you have the fact that the Fed missed this by predicting only a drop of 4 billion, thats 5 fold mistake, wonder what the market will make of that great big MISS!

Sep 09 06:21 AM

[Jiang Nan:]

Huge pile of money ($3.58 trillion) sitting on the side line.

Is that really a plus? Or are the smart money so wary of stock they are willing to accept safety and a paltry 1-2% return!

Sep 09 06:43 AM

[Roger Knights:]

"V", "W", "L", "U", or, my favorite "Z"

Don't forget "h" (for a ski-jump "recovery"--then collapse).

Sep 09 07:47 AM

[a fat panda:]

Everyone should be leary of short-term historical comparisons because of the amount of government intervention, which is at historical highs say over 200 years.

All of the positives are comparisons over the recent history where the impact of government invention is more pronounced. The intervention say cash-for-clunkers or housing incentives were not around in the year ago period. While there may be a larger stimulus plan, and given the fall in retail comps, the next support may be for retail.

The negatives draw more on longterm statistics. The S&P is trading over the historical average when companies are enjoying the benefits of government intervention. Debt to income data does not include the impact of higher taxes in the future.

So you have to ask : What are you going to do when the government subsidizes end? Of course, the government may yet have a larger stimulus plan to boost the economy again. But if you think that is going to happen, you are betting on the government, not investing in a company.

Sep 09 08:47 AM

[Wayne A. Co...:]

Most of those that are calling for a recovery are counting on a robust rebound in consumer spending, which is what our economic growth has been based on for decades. The only way to do that is by the consumer taking on more credit.

Insanity.

Sep 09 08:58 AM

[JLarkin:]

I see other bloggers out there claiming the S&P web page shows the S&P P/E ratio is 145 (TTM) or something like that. Where did you find 17, which sounds more realistic to me? Is 17 based on the forward looking 12 months?

Sep 09 09:56 AM

[mr galt:]

Though I would love to watch Ms. Sonders talk about the market or anything else she wants to talk about, I am short the market and will be until I'm rich or broke. The day of reckoning is coming, though admittedly I may join the ranks of the bankrupt before it arrives.

Sep 09 10:15 AM

[zagrebzagreb:]

Regarding the above comment on the aggregate S&P P/E ratio....

Yes, I've been looking for a reliable source on that figure myself. Anyone have a suggestion on where to look? In terms of market under / over valuation, I just think its a great number to help keep your perspective.

Sep 09 10:16 AM

[The Hammer:]

The high priced experts are out of touch with reality. One only had to shop for a hpuse in 2002-2003-2004-2005-2006 to see the insanity in the mtg/housing market.
These over priced soothsayers have not felt the impact of stagnant wages for years.
Where the hell is this V-shaped demand going to come from? More leverage and credit? The only entity right now piling on debt is the federal govt along with its toll the FHA and fnm. How long can these ponzi schemes last? Not for ever.....but maybe we can withstand a few more years of this kamakazi like monetary policy before the tipping point takes hold.
A major crisis is coming in our currency and the american sheeple who close their eyes to all this cuz it does not impact them is in for a rude awakening.

Sep 09 10:40 AM

[No Free Cake:]

See:
www2.standardandpoors....

This S&P spreadsheet shows the 12m forward operating earnings at 16.88. If bloggers are quoting large multiples, they are trailing and probably "as reported" rather than "operating". Pick your favorite.


On Sep 09 09:56 AM JLarkin wrote:

> I see other bloggers out there claiming the S&P web page shows
> the S&P P/E ratio is 145 (seekingalpha.com/symbo...)
> or something like that. Where did you find 17, which sounds more
> realistic to me? Is 17 based on the forward looking 12 months?

Sep 09 10:54 AM

[NUCLEAR1929:]

i dont see any bulls, all i see is mass destruction of wealth, debt, bankruptcies, danger of wars, unemployment...

Sep 09 11:26 AM

[Skjellifetti:]

Saturday WSJ publishes a table with both forward (estimated) and trailing PEs for the U.S. The Saturday FT has a chart that shows forward PEs for most investable countries. These might be published on other days, but I seldom bother to buy these papers M-F.


On Sep 09 10:16 AM zagrebzagreb wrote:

> Regarding the above comment on the aggregate S&P P/E ratio....
>
>
> Yes, I've been looking for a reliable source on that figure myself.
> Anyone have a suggestion on where to look? In terms of market under
> / over valuation, I just think its a great number to help keep your
> perspective.

Sep 09 12:07 PM

[willynill:]

It is confusing because Barron's and Wall Street Journal, both Dow Jones publications report different trailing (current price divided by latest 12 months' earnings) P/Es. Barron's (online) under Data & Tools, Market Lab reports the S&P 500 P/E as 128.66 based on earnings of $7.90. The WSJ (online), under Market Data, U.S. Stocks Highlights reports the trailing P/E as 69.11, but with a P/E based on future estimated earnings of 16.69 (that would be current price divided by next 12 months' estimated earnings). My own view is that these estimated earnings may be too optimistic. Someone else has written about the huge difference between top-down and bottom-up estimations of future earnings.


On Sep 09 09:56 AM JLarkin wrote:

> I see other bloggers out there claiming the S&P web page shows
> the S&P P/E ratio is 145 (seekingalpha.com/symbo...)
> or something like that. Where did you find 17, which sounds more
> realistic to me? Is 17 based on the forward looking 12 months?

Sep 09 12:58 PM

[Mad Hedge F...:]

khgjk. Well, you certainly don’t need my help anymore. With everything in the world going up but the greenback, you certainly don’t need the advice of financial advisors, brokers, pundits, or sadly, even this humble online columnist. I never thought I’d see the day when stocks, bonds, gold, silver, oil, natural gas, copper and collectable beany babies were all up in unison. Not only is the punchbowl ubiquitous, but the Kool-Aide is spiked with ecstasy, and it is so large, that there is a risk we might fall in and drown. Industry analysts are now putting out forecasts for their individual companies implying a 5% GDP growth rate next year, but macroeconomists at those very same houses see 2% as a stretch. All of this in the face of a catatonic consumer, $3.40/ gallon gasoline, and banks maintaining a death grip on lending to any but the primest of borrowers. I guess this is what happens when the Fed is determined to keep interest rates at zero, for as far as the eye can see, and the printing presses in Washington DC are running so fast that I can hear them here in San Francisco. With $4 trillion in cash sitting on the sidelines there is a risk that the faith based rally will continue. Is the Fed trying to cure a burst bubble with a profusion of bubbles?

Sep 09 01:35 PM

[Moon Kil Woong:]

I hate the comment money sitting on the sidelines. Money sitting on the sidelines means money allocated elsewhere, whether it be US bonds to get paltry returns for safety (while letting the government spend like a glutton), deposits in the Fed for paltry returns (which lets the Fed buy up the troubled banks assets that they don't want and engage in QE), or in corporate bonds or better yet commodities and overseas assets.

People waiting for some heyday where every penny is invested in the stock market can give up their economist asperations right now. Analysts exposing this should get angry letters to the brokerages they work for questioning their credibility.

I would say enough money is already in the market considering over 30% of the volume daily is being put into garbage like Citibank, FReddie Mac, and AIG. People playing those are certainly not looking for value. Speculation and rampant gambling still thrives in the market.

Sep 09 10:16 PM

[knownothing:]

To see what happen if govenment exit stimulus now.

Sep 10 11:35 AM

[zagrebzagreb:]

Thanks for all the sources regarding aggregate P/E ratios...

I happened to notice that the huge spread in forward vs trailing P/E ratios is more or less a recent event. (Not really surprising, but still...)

The most recent forward P/E ratio according to S&P is 18.56... the trailing ratio is 116.31.

Now consider three years ago (2006, before everything went kaboom): the ratios were 16.35 and 17.82, respectively. Or in other words, the actual and forecast were essentially comparable.

I'm not usually a person to say that one ratio or number can explain the market, but wow...! Estimated future earnings really are shoocking.

Sep 10 12:29 PM

[No Free Cake:]

Zagregzagreb: I'm not that shocked by "estimated future earnings". The actual earnings for the most recent quarter were $13.81 (operating). In the MRQ "operating" and "as reported" earnings were similar.

If you just assume companies will maintain earnings at this level you get a 12m forward of $55.24 giving a PE of just under 19 at current value of S&P 1043.

If you look at the spreadsheet link to S&P I provided a bit earlier, you'll see in the 20001-2002 recession the multiple was generally much higher. In the current case growth is likely harder to come by than in the previous period so a lower multiple is reasonable.

In my view, it's unlikely that spending will be drastically reduced from the current pace so earnings should be at least maintained.

Sep 11 10:27 AM