Currently, the conomic indicators continue to point to shallow growth for the US, and more
recently an eventual sharp deceleration of inflation. Investors have been concerned for a good year
that the splendid corporate profits seen so far could not long outrun an economy that merely schleps
along. Now, we have official Washington on a kick to cut the budget deficit and restore fiscal
"integrity". We have an EU trying to hold itself together as it struggles to keep its weak sovereigns
afloat. We have China and other emerging economies using tight credit to rein in accelerated
inflation after a period of rapid recovery growth. In the US, for one, there are deep concerns about
a program of aggressive budget deficit cutting which could badly damage growth if enacted. Naturally,
the S&P downgrade only adds to the pressure as a clueless Washington struggles to tackle the
budget. It all adds to a reduction in clarity for the outlook regarding profits growth.
Investors gave one p/e haircut over the past year or so from 16.6 x 12 mo. earns to 14.0 x. Now,
they've moved the p/e down to 12.3. Some of this adjustment is normal handicapping for an
evident slowing of the momentum of profits from exceptional levels, but clearly, there is
concern regarding growth potential. On my long term p/e model, the p/e ratio should now be
16.4 x and the SPX should be up at close to 1500 rather the current 1119.
Players have lost patience with struggling to price in continuing large uncertainties and are
moving to re-price risk more conservatively -- If the growth may not be so good, well then I
need higher yield to earn a decent return for risk capital. And they are doing it quickly now.
Although the economy has been recovering and has been slowly broadening out, it remains
fragile and can be badly undermined by shocks like a financial crisis in the EU or dumb,
heavy handed fiscal austerity in the US. So the guys worry not only about the visibility of
recovery but its sustainability as well.
A p/e ratio for the market has high economic content, but it also has substantial psychological
content in the form of confidence about the future. When the confidence factor in valuation is
shifting, whether up or down, it is very difficult to make good market calls even when you
think you have a good handle on the fundamentals.
My indicators suggest it is too early to look for recession, but I think we need to see much more
clarity in favor of improving growth to stave off more dimunition of the market's multiple. In this
regard, you have to stay vigilent because the skies can start to start to clear as fast as they cloud up.
Now the market has grown so oversold so quickly that there should be a fast tradeable rally
coming soon enough even if it is but a "dead cat bounce".
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!