We have remained bullish this year and the market continues to march higher. As of this writing the S&P500 closed above 1700 for the first time ever. Though there have been several new concerns for the market to address, buying the dips is still in vogue. This trend will continue until it doesn’t. Translation; A market correction is inevitable but impossible to time. We believe we are in the midst of a secular bull market that may last for years. We are going to see corrections but, even as much as a ten percent contraction is normal in the context of a secular bullish ascent.
Therefore, we remain optimistic intermediate and longer term for several reasons: Better housing and labor markets, growing domestic energy production, the trend for growing U.S. industry, pristine corporate balance sheets and heavy cash positions, corporate debt is cut in half, the necessity of capital expenditures, and the beginning of a transition from bonds to stocks.
Corporate earnings continue to trend higher and are up every year since 2010. Forward estimates are moving towards $120 for the S&P500 which would still be reasonably valued at 14x earnings. In fact, equity valuations are still compelling based on price to earnings, cash flow, book value and sales. Yes, the market indexes may be at all time highs but, we are far from the valuation high of the individual index components. Valuation is the relevant factor as to where the market may be heading.
We have seen individuals come back to the market utilizing the historic amounts of sideline cash. There are also signs that we are in the early stages of reallocation to equities from bonds. This development can provide added liquidity to fuel the bull market. Individual investors have leaned toward the bond-like, defensive, dividend paying equities, however, we are now seeing an inclination to move toward the more cyclical and growth areas of the market. This is a signal of growing confidence which is always a primary ingredient in the recipe for a bull market.
There will be speed bumps ahead including the potential for the Fed to taper the monthly bond buying stimulus as well as other unpredictable events. We anticipate that a market contraction created by these circumstances should be considered an opportunity rather then a time for emotional reactions.
The market is up eight of the last nine months and registered its best first half of a year since 1998. Though the short term is hard to predict with confidence, we do expect the market to end the year higher and remain bullish intermediate and longer term.