On the 19th of September, the S&P 500 index hit its all time high and high for the year, at 2019.26, however since then, has provided a rocky torrid ride for investors. From the close of 2013 to September 19th, the index was up 9.18%, on track for an annualized return of over 13% – excluding dividends. However, from the high, the market has moved in one direction only – downward. As of yesterday (13 October 2014),the index was down 7.19% from the high, and up just 1.34% for the year. In its fall, the index has broken through a number of technical support levels (including most recently, the 200 day moving average), leaving many of the market bears in “I-told-you-so-mode” (we should at this juncture note that the 200 day moving average has never really provided support to the falling index, so this move through it is nothing new). The same but worse was seen on the Dow Jones Industrial Average, which fell 5.99% from the high, more than erasing gains for the year, leaving the index down 1.61% since the December close – a sorry sight for investors.
S&P 500 Index Return- 2014
Dow Jones Return 2014
However, while many technical traders are calling a major crash, the fundamental story in the US remains positive, and by all accounts, improving. The US economy is creating jobs (lots of jobs), it is growing (adding gross value added at an ever increasing rate, nominally), consumers are increasing in confidence and spending more in the high street, and the forward indicator of manufacturing – PMI – shows major expansion – the highest quarter end level since Q2, 2011. The fundamental story is good, and the market is diverging from this, apparently taking a poor view of global economic conditions. This skepticism is perhaps warranted, however, US earnings are likely to be highly positive, at least for the next 6 months, which should support higher equity prices. Or, all the indicators are wrong – an unlikely situation.
US Unemployment
US Jobs Created
US GDP Growth
US PMI
Earnings estimates suggest that earnings growth will total 17 percent over the next year, which not only justifies the current relatively high valuations on the index, but significantly higher prices over the next year. Based on this, and the economic data, we remain of the view that these dips are worth buying and are confident that current purchases will be in the money (possibly significantly so) before year end.
US Best EPS
That said, as always, the proof of the pudding is in the eating, and with a number of major large cap S&P companies announcing results this afternoon, we will soon know whether it will be a piece of cake for investors or humble pie for me.
Track earnings releases at: http://www.ijg-research.net/regular-research/sp-500-index/