Confidence has improved since last autumn but remains on the subdued side. The market does
continue moderately overbought, but the idea that players are zealously bullish is nonsense.
Price / Earnings Ratio
The market is trading around 14.5 x 12 mos. net per share through 3/31. In an economic recovery
with rising earnings and low interest rates and inflation, the SP 500 should be trading up at 16.5x
Credit Quality Spreads
The ratio of top quality corporate yields to lesser light BBBs stands at .69. By past standards that
ratio should stand up toward .85 at this juncture of an economic expansion.
Comparison To Treasuries
The earnings / price yield % for the SP 500 measures the return on equity at market value. The
e/p yield is now running 6.8% compared to the 10 yr. Treas. in a range of 2.0 - 2.5%. The e/p
yield is at a substantial premium. Naturally, a near zero short rate is holding yields on longer
maturities down, but preference for quality and perceived low risk remains very high.
I did a good job at laying out the unfolding of the recent powerful rally in the market, but, so
far, volatility has come a in fair bit lower than I had anticipated. The chart link ahead compares
the SPX with its 12 day ROC% and the VIX, or volatility premium inherent in index options.
$SPX The chart's top panel shows a sharp decline in short term price volatility and the bottom panel shows a hefty decline in the VIX or "fear" index. A VIX reading in a range of 10 - 15 reveals
a decent level of market confidence. Should the VIX drop down to 10 and stay there for a
goodly number of weeks, we would be entitled to say that investors have grown both smugly
confident and highly complacent. We are not there, yet.
- 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 !!!