Back in a post on Sep. 27, 2015, with the SPX trading below 1900, I claimed that the SPX could
close out 2016 at 2160 or even a little higher. Folks were not bullish back then, so it was a nervy
call. Moreover, since 2016 is not over yet, who knows whether the SPX, now at 2161, will hold
up. Even worse, the reasoning behind the call was not strong, since the US economy and SPX
net per share has under-performed my expectations for the year by a wide margin to date.
Nevertheless, with the economy just starting to do a little better now, I am going to take some
credit. But there may be a cautionary moral here.
For old timers such as me, who know even that the market can hold up when the oil price tanks,
the suppression of earnings since late 2014 borders upon unnerving. Profits potential for the SPX
companies is finally improving, but top line or sales performance is still very subdued and it is
fair to say that market players ought to be more concerned than they are. Since the 1960's, it
has been popular to hold to the idea that the SPX p/e ratio varies in inverse relation to how the
inflation rate is performing in the economy. In this case, the very low CPI is translating into an
elevated p/e, buttressed surely by historically low interest rates. But the p/e ratio has historically
been a measure of investor confidence, too. If the low inflation and interest rates reflected an
economy that was expanding decently fueled by strong productivity growth, may be one need
not worry about a high market multiple. But the economy has moved along only slowly in a
shaky global environment with increasing social stresses evident. One can make the case that
there may be more monetary easing and even some fiscal stimulus ahead, but in classical terms,
one can also argue that the SPX is already discounting a sizable profits recovery, and one is
free to wonder what the market, strong since earlier in the year, can do for an encore near term.
- 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 !!!