The stock market finished little changed last week in quiet summer trading. August doldrums were punctuated briefly by all-time highs set on Thursday, though prices retreated slightly on Friday.
Soft U.S. retail sales and consumer sentiment data out on Friday dampened investor enthusiasm. Interest-rate hike expectations eased, which led to a 1% drop in financial stocks on the week.
All three major U.S. indexes hit highs simultaneously on Thursday, the first time that has happened since Dec. 31, 1999, during the dot-com boom. (The Nasdaq did it again on Friday.) That era seems a long time ago in a galaxy far away. Today’s market continues to rally despite finding little support among institutional investors and facing downright skepticism in many quarters. Perhaps that’s where the bull’s strength lies.
The Dow Jones Industrial Average rose 33 points, or 0.2%, last week, to 18,576.47, below the record high of 18,613.52. The Standard & Poor’s 500 index inched up by one point to 2184.05, just below its high of 2185.79. The Nasdaq Composite gained 0.2%, to 5232.89, another new high.
Investors live in a world of low corporate profit growth and low bond yields, notes Douglas Cote, chief market strategist at Voya Investment Management. That’s conducive to making an already pricey market—the S&P 500’s price/earnings ratio is 18.5 times 2016’s earnings—more expensive.
The desperate search for yield continues, as evidenced by the better-than-18% returns this year in ho-hum sectors like telecom and utilities. Consequently, says Cote, the market shouldn’t be measured against its own historical average P/E, about 15 times, which suggests it is expensive. Instead, it should be compared to bonds and other alternatives. With the Treasury’s 10-year note yielding 1.5%—near lows not seen before in modern history—there’s no alternative to stocks for investors who want returns.
The more stocks go up, the more those sitting on the sidelines will be forced to capitulate and join in, Cote contends. Thus, he maintains, the market can continue to get more expensive in the context of such low bond yields.
In a way, this market—though much less expensive than it was in the dot-com era, when its P/E hit 28—has something in common with that old bull. In those days, there was an emotional euphoria about powerful profit-growth expectations, driven by then-new Internet stocks. Today, another emotion—a desperation for yield—mirrors that euphoria. In 1999, the market reached its 28 P/E when bonds were yielding about 6.5%—yes, you read that right.
(Source: Barrons Online)