S&P 500 Index at 700. Time to Buy Stocks?

At what point do stocks provide attractive valuation?  That’s the key question that, like you, professional investors always ask.  With stocks being down 55% from their October 2007 all-time high, is this a good time to get into stocks?

Copied below are two emails I sent to colleagues before I started the ReconCap financial blog.  I share this with you so that you get a better understanding what I’m currently thinking and my intentions (see 5p, Mission).

The first email titled, “700 on the S&P”, is dated 12 February 2009, when the S&P 500 index closed at 835.19, or 16.1% higher than current market levels.  I should also say that I have been in cash with no stock or bond holdings well before the turn of the year. 

The 12 February email: 

 

·         Believe we will see 700 on the S&P in the near future.

 

·         Global confidence is waning.  The Treasury’s [bank bailout] plan lacks detail.  According to CNBC, Goldman Sachs had an emergency meeting after Geithner’s speech, citing a decline in confidence in the Treasury Secretary’s ability to manage this crisis.

 

·         European [banks] have only written down about $250 billion in non-performing assets v $750 billion in the US.  They are lagging and the impact of future write-downs should have an adverse effect on European stocks, if not globally.

 

·         Hopeful energy investors have yet to capitulate to slower economic output, [which] will keep pressure on crude oil prices.  To me, it is more possible to see $25/barrel [crude oil] before $50[/barrel] in the near future.

 

·         Bottom-up [analysts] earnings expectations [are] still too high.  As they come down so too should the forward P/E [price-to-earnings ratio].

 

·         There is little [market] interest in buying [stocks] with little reason to do [so] in the interim.

 

I followed up on that message with this email titled, “Still in Cash”, dated 20 February 2009.  When written, the S&P 500 closed at 770.05:

 

·         Stocks are off worldwide.  Worries are coming from everywhere.  Western European banks are [on] the hook for eastern European construction and investment.  There’s been a near-run on eastern European currencies, suggesting that one or more of the sovereigns are in jeopardy in defaulting.  As a result, Western European banks are down, bringing down the major [European] indices.

 

·         In the States, there’s more of the same, but with a surprise pop in PPI [producer price index], suggesting [that inflation] is here again (if so Gents, it is a good thing; deflation is the killer).  There’s been a drop in confidence in the Administration’s ability to handle and navigate through this crisis, in my view.  Earnings are worse than expected.  Thus, stocks are down.

 

·         In Asia, exports are simply paltry.  These export-dependent economies are not immune to things that have transpired in the US and Europe.  [Those economies rely on Western demand].

 

·         China has pumped $600 billion in [economic] stimulus.  I understand that a good third of that went into buying stocks.  If so, that market is due to retract.

 

·         I’m on the sideline in cash.  As I said last week [see above email], I think there’s a possibility of reaching 700 on the S&P.  At that point, I would be inclined to invest in stock, again, with a hedge in gold.

 

So here we are at 700 on the S&P 500 Index (don’t mind the Dow Industrial Average; professional investors monitor the S&P 500 as the best US stock index that represents the broader economy).  We are here because what had been triggered by the subprime mortgage bust in 2007.  We are here because of the credit crisis that followed.  We are here because of the ensuing financial crisis.  We are here because of the resulting economic decline.  We are also here because the situation is global.  And we are here because there’s a growing realization that the European, Asian and Middle Eastern markets and economies are feeling the financial crisis and economic recession bite just as much as, and possibly more than, the US financial markets and its economy.

But stocks, representing ownership and thus entitlement to earnings and dividends, assign value to those future earnings and dividends.  The more uncertainty (confidence) is of earnings and dividends estimates the more stocks prices discounts (reflects) those outlooks.  Currently, the S&P 500 is sinking on the uncertainty of earnings and dividend projections.  However, there are at times that stock prices swing too much, and more than discount those uncertainties, thus providing investors with attractive valuations.  The question is:  are we at that point? 

The answer, as always, is unknown, but confidence of such will at some point shore up.  I think we’re nearing that point.  Thus, I think we’re close to a time to put some cash (Some!  Don’t jump into the rough waters with both feet!) to work and buy some stock.

With the constant drumbeat of bad news, stocks are finally low enough to reflect that bad news, in my view.  Of course, I could be wrong, but again, with the S&P 500 55% off its all-time high in October 2007, I’m finding stocks, in general, more attractive.  I am growing more comfortable in going against the stampede of negativity simply because I believe valuations are beginning to discount all that uncertainty and bad news.

 I cannot link the above emails.  But upon request I’ll readily supply them.

Keep pressing,

Chris Monoki

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