Posts Tagged ‘S&P 500’
The concept of corporate earnings being the single biggest factor that drives key stock indices like the S&P 500 higher has been thrown out the window.
While I continue to see analysts issue buy recommendations for the S&P 500, the fact of the matter is that profits at companies that make up the S&P 500 are declining. For the first quarter of 2014, corporate earnings for the S&P 500 companies are actually expected to decline by 1.6%. (Source: FactSet, April 11, 2014.) That’s the biggest drop in public company profits since 2009!
But the stock market doesn’t care if corporate earnings are declining…just like it doesn’t care if interest rates are rising. These are clear signs the market is acting irrationally—an indicator of a stock market bubble.
Just look at what happened with The Coca-Cola Company (NYSE/KO). This well-known S&P 500 company reported that its first-quarter 2014 corporate earnings declined by eight percent and revenues dropped four percent compared to the same period one year early. (Source: The Coca-Cola Company web site, last accessed April 15, 2014.)
But the market took Coca-Cola’s stock price higher on the bad results!
Below is the chart of Coca-Cola’s stock price, just as the markets opened (circled area) after the company reported its poor corporate earnings results. The stock gapped up 2.8%! This confirms my take that the fundamentals don’t count anymore to investors.
At the end of the day, all of this seems too familiar to us. This is what we have seen prior to other stock market sell-offs: investors discounting all forms of time-proven stock market valuations because … Read More
The International Monetary Fund (IMF) has lowered its growth forecast for the global economy. It says the world economy will now grow by 3.6% in 2014 and 3.9% in 2015; it grew at three percent in 2013. (Source: International Monetary Fund, April 8, 2014.)
I see the IMF forecast on global growth as being far too optimistic. In fact, I think we’d be lucky to get three percent growth in the global economy this year. Key indicators I follow suggest demand in the global economy is close to outright collapsing.
Consider the chart below of the Baltic Dry Index (BDI). This index tracks the shipping prices of dry goods in the global economy. If it declines, it suggests global demand is declining. The BDI has plunged more than 48% since the beginning of the year, pointing to slow growth for the global economy ahead.
Manufacturing is another indicator of demand in the global economy that we follow. If manufacturing activity increases, it means demand is increasing and that consumers are buying more. Sadly, global manufacturing is suggesting an economic slowdown is the most likely scenario ahead.
The JPMorgan Global Manufacturing Purchasing Managers Index declined to its lowest level in five months in March. (Source: Markit, April 1, 2014.)
Adding to the misery, most economic hubs are telling the same tale.
The eurozone is still in trouble; the European Central Bank is contemplating its own quantitative easing program as Italy just reported its highest unemployment rate ever recorded. China is pumping out weak economic data. Japan’s economic slowdown isn’t taking any break despite the central bank … Read More
Those who follow the stock market closely know that on days when we hear the chairwoman of the Federal Reserve speak and she mentions something about “easing” or how the central bank will continue to use its “extraordinary measures” for a long period of time, the stock market jumps.
I’ve talked about this phenomenon many times in these pages. Another example of this happened on March 31, when the Fed chairwoman spoke in Chicago. Please see the chart below. It’s a minute stock chart of the S&P 500. I’ve circled a rough area around the time when Janet Yellen spoke.
As she spoke more of that “easing” talk, the stock market jumped, as usual.
So it has come to the point where the stock market rises when it hears the Fed will keep interest rates artificially low for a prolonged period of time and when a poor jobs report comes out (like last Friday morning’s), saying jobs have been created in spite of the fact that there is a heavy concentration of jobs growth in low-paying sectors and millions of people have given up looking for work.
In other words, we have reached the point where the stock market takes any news as a reason to move higher; this is characteristic of a market top.
When we look at the fundamentals of the stock market, we see companies in the S&P 500 are using financial engineering to boost per-share earnings. These companies have bought back their shares and have been cutting costs to boost profits as revenue growth just isn’t there anymore.
The proof? In the … Read More
Stock market valuations are severely stretched by historical standards. Earnings multiples and other financial ratios no longer make sense. But despite this, investors are still buying.
I continue to preach: the days left in the stock market’s rise are numbered.
As I see it, excessive speculation rules the stock market right now. And that is dangerous because investors are making decisions that they shouldn’t be making. Irrationality is growing. Those who say the stock market will decline, like me, are few and far between.
Investors are putting big money into companies that are nowhere near being profitable.
Just look at Amazon.com, Inc. (NASDAQ/AMZN), a component of the S&P 500. According to bigcharts.com, Amazon.com stock is selling at 573 times its earnings! Since the stock market rally that began in 2009, the stock price of this online retailer has climbed more than 800%.
The price-to-book ratio of Amazon.com (that is the ratio of market value of the company compared to its book value) stands at 17.38. (Source: Yahoo! Finance, last accessed March 24, 2014.) The price-to-book ratio for Amazon.com’s sector—online retailers—is 11.0. (Source: New York University Stern School of Business web site, last accessed March 24, 2014.) By this measure, Amazon.com is overvalued by almost 60% compared to its sector average.
But Amazon.com is just one example of an overpriced stock; there are many other companies in the S&P 500 that don’t make sense as an investment, unless you are playing the “greater fool” theory. That’s when you buy a stock not because it pays a good dividend or because it makes a lot of money, but because the next guy … Read More
We have Russia annexing Crimea from Ukraine and interest rates set to float higher sometime in early 2015, but the S&P 500 continued to edge up to another record-high on Friday.
Federal Reserve Chair Janet Yellen is continuing to pull back on the quantitative easing that the former chair, Ben Bernanke, put in place. By year-end, the bond buying will likely be eliminated as the central bank allows the economy to try to stand on its own two feet. Of course, if everything goes well, Yellen also plans to begin ratcheting up interest rates as soon as early 2015. This could impact the stock market.
The upward move in interest rates and the elimination of quantitative easing means the easy money that had been pumped into the economy by the Federal Reserve will come to an end. This is concerning for the stock market, as the easy money has largely been the key reason why we are in the fifth year of this superlative bull stock market.
While it’s enticing to sit on all of the gains achieved so far, you should also be conscious of the profits made and should look at several risk management strategies.
The most important lesson is to take some money off the table and avoid soaking a possible downdraft in the stock market that could severely reduce your gains.
Making sure you have an exit strategy is paramount at this time.
I fully expect another downside move in the stock market sometime in the upcoming quarters. (Read “Stock Market Setting Up for Its Next ‘Fire Sale’?”)
You can also set a … Read More
According to FactSet, between January 1 and mid-March of this year, 195 of the S&P 500 companies have used the word “weather” in some manner in their conference calls. This is 81% higher than the same period a year ago, when 108 of the S&P 500 companies used the term “weather” in their conference calls. (Source: FactSet, March 14, 2014.)
Public companies in key stock indices are preparing investors for poor first-quarter earnings by saying poor (extra cold) weather conditions this year are putting a damper on sales.
Take FedEx Corporation (NYSE/FDX) as an example of the many companies on key stock indices blaming the weather for dismal corporate earnings. While presenting its most recent quarterly corporate earnings for the three months ended February 28, the CEO of the company said, “While severe winter weather often affects our (fiscal) third-quarter results, the impact from multiple severe storms and frigid temperatures was significantly more pronounced this year and we are reducing our full-year earnings per share guidance as a result of the weather impact.” (Source: “FedEx Corp. Reports Third Quarter Results,” FedEx Corporation, March 19, 2014.)
How can you lay blame on one quarter’s “bad weather” for the entire year’s earnings performance? The way I look at it, the “weather” is just a “blame factor” for companies in key stock indices that are facing earnings growth issues.
Stock analysts have really been busy lowering their corporate earnings expectations for companies in key stock indices. In the first quarter of this year, on average, analysts expect the corporate earnings of the S&P 500 companies to increase by only 0.3%. At the end … Read More
As key stock indices like the S&P 500 make new highs, bullishness increases almost daily, and stock advisors are saying buy more.
I am not surprised by this. All of these irrationalities tell us something very important: the bear is doing a great job of luring investors back into stocks as it gets ready to take their money away once again.
Dear reader, heed the warning signs of a market top…
Those who are very close to the companies in key stock indices are selling their shares at an extreme pace. According to CNBC, in February, insiders sold $5.3 billion worth of shares and bought roughly $268 million worth of shares; for every one dollar of stock they bought in February, they sold about $20.00 worth. (Source: “Insider Activity and Concentration by Industry,” CNBC web site, last accessed March 5, 2014.)
According to the Vickers Weekly Insider Report, corporate insiders are more bearish on the stocks of the companies they work for today than at any other time since 2007. (Source: MarketWatch, March 4, 2014.)
But insider selling activity isn’t the only indicator that worries me about the direction of the key stock indices. We see problems in corporate earnings, as well.
The number of companies warning about their corporate earnings for the first quarter of 2014 continues to increase. So far, 84 companies on the S&P 500 have issued negative guidance about their first-quarter 2014 corporate earnings. (Source: FactSet, February 28, 2014.) Remember: corporate earnings, at the core, are what drive the key stock indices higher. Even analysts aren’t very optimistic about corporate earnings; they are expecting first-quarter … Read More
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