Stock market volatility has increased recently with triple digit moves up and down almost every trading session. Increased volatility is often seen as a sign that a change in direction is near. Many have been calling for a correction after the significant move since the beginning of the year. Some backing and filling would actually be healthy for the market and make the next up move more sustainable.
We believe that weakness will continue to be seen as opportunity as the velocity of the market’s rise left many investors on the sideline. During the last few months there have been several news items that were going to derail the bull market. We had a significant pullback when Italian elections did not go as desired. Then there was Cyprus and the news that the government would seize bank deposits. Now it is the Bank of Japan which has created extreme fluctuations in the Nikkei and Dollar/Yen. This too will fade into the news archives and we will continue to focus on the fundamentals.
Yes the market has appreciated significantly since the low of 2009. But, earnings have improved dramatically too and S&P500 earnings are at an all time high well above the previous market peaks in 2000 and 2007. Equities are still fairly, if not reasonably, valued based on earnings. Hoever, it is not only the P/E ratio. Longer term, the S&P500 is below its average for price to earnings growth, price to sales, price to book value, and price to cash flow. The dividend yield for the index is also much higher than its longer term average. Companies have extreme amounts of cash on hand and are buying shares, increasing shareholder dividends as well as capitalizing growth.
We remain intermediate and longer term bullish based on what we perceive as solid underlying fundamentals. Short term the news of the day will influence the market direction but, longer term, the fundamentals always win.