Wow, the market is going straight down. While the S&P 500, and its tracking exchange traded fund, SPY, has had relief rallies over the last month, the market has failed to sustain any recent rallies for more than a week. The Nasdaq, also, has steadily declined for the last month as well.
Even leading companies such as Apple (AAPL) saw its shares declines by nearly 15% from the price of around $650, to below $540 earlier this month.
I recently wrote that I expected a relief rally failed by a significant decline. While I did not think the move higher would fail after one day, the market obviously appears to want to move lower near-term. Still, with many major sectors having sold-off too hard, I think it is worth reexamining the fundamentals and technicals to see if the market is likely offering value today.
The first reason the market will likely not sell-off significantly more from today's levels is because the underlying fundamentals of the U.S. economy remain strong. While the recent job reports and other seasonal economic data such as the purchasing managers index have been disappointing, consumer spending trends have remained healthy for several quarters.
Citigroup, JP Morgan, Visa (V), Mastercard (MA), and other major banks, recently reported a second straight quarter of significant growth in credit card and debit card transactions. US Bankcorp (USB), one of the largest credit card issuers in the world, recently reported 9.8% year-over-year growth in credit card transactions, and 8.4% year-over-year growth in debit card transactions.
The U.S. economy continues to expand at 2-2.5%, and even leading European companies such as Siemens (SI), which saw significantly weakness in the company's European products and services in Europe, recently guided to double digit sales growth in the U.S.
The second reason the market is likely close to a bottom is that most of the broader European indexes are now at the lowest levels they have been at in over a year. With the German and French market, and these country's broader indexes tracking exchange traded funds, the EWG and EWQ, trading close to summer of 2011 levels not seen since the height of the European credit crisis last yea,r when the VIX was over 50, European markets will likely have limited downside from here.
While, obviously, Europe's economy has remained very weak, Europe is still an export based economy, and exporters such as Siemens are seeing strong growth in the United States. The VIX has also stayed in the 20s despite rising significantly from below 15 earlier in April, and with operation long-term refinancing already in effect and new a new government in France, European leaders now have a framework for how to approach the Euro-Zone's fiscal woes.
The third reason the market will likely bottom soon is yield. While valuing cyclical companies in an uncertain economic environment is difficult, with rates likely to remain low, dividends of 4% of more have value. With companies that have strong balance sheets and stable revenues such as GE and Chevron (CVX) now yielding near 4%, stocks will likely have value at these levels for long-term investors as long as a recession is not feared.
Leading technology companies, such as Microsoft (MSFT) and Intel (INTC), have strong balance sheets and significant free cash flow. Microsoft has raised its dividend by 25% the last two years, and Intel has raised its dividend around 20% in the past year. Apple recently initiated a nearly 2% dividend as well, and has nearly 100 billion on the balance sheet today.
To conclude, while markets are weak and the growth outlook is uncertain today, consumer spending and growth in the U.S. remains steady. With corporate balance sheets strong, stable dividend yields approaching 4%, and European stocks trading at panic levels, the market is likely close to a long-term bottom. While the growth is obviously uncertain, with new governments in France and China this year, and a presidential election in the U.S. later this year, governments will also not likely stand-by idly if the growth outlook continues to deteriorate.