To follow the Doom and Gloom that seems to me is an addiction for many. Be it 2.2 million deaths due to Coronavirus*, Millenials are snowflakes, CO2 will destroy us all or the one I want to address today, the “stock market” is a house built on sand.
I can’t tell how many times I’ve heard this since I started investing in 1994. The “stock market” is gambling. The markets are propped up by the Fed. The government spending will doom us all.
And yet in 1994 when I was all of 24 years old the S&P 500 stood at the low, low price of 472.99.
Two years later, Alan Greenspan uttered his immortal words “irrational exuberance” when the S&P 500 stood at 735.67.
At market close last night (3/30/2020) the S&P 500 stood at 2626.65, which is 22.6% off its all time high of 3393 just a few short weeks ago. (Of course, this is 19.8% ABOVE its low on March 20th.)
But never mind all that. What’s important is EARNINGS. Earnings drives prices. So, depending on who you read earnings for the SP 500 in 2019 were between 133 and 163. I actually like the folks at Ed Yardeni research so we’ll use them and their 163 earnings number.
Let’s then take the close of the SP 500 on 30 Dec which was 3221. Divide that by Yardeni’s estimated 2019 earnings of 163 and we get a P/E ratio of 19.76. If that seems too low for you we can take the 133 earnings instead and come up with a P/E ratio of 24.21.
Either number you use is considerably higher than historical averages of 15.5. This is where the negative Nellie’s among us will scream “this is unsustainable!!! See the Shiller CAPE ratio!!!!”
Going forward, a couple estimates I’ve read suggest earnings decreases of HUGE proportions in 2020 because of the Coronavirus. 33% is what Goldman Sachs says. Yardeni himself is thinking 26%.
Using Yardeni’s numbers again, he has earnings dropping to 120 for 2020 for the S&P 500. Current price is 2626. So, if Yardeni’s earnings projections are correct and he does have a good history of this, right now the FORWARD P/E of the S&P 500 is all of 21.88. Not cheap, mind you, but certainly not a depression.
If we use the 133 2019 earnings of the SP 500 and Goldman Sach’s 33% decline that puts earnings for 2020 at 89.11.
Divide 2626 by 89.11 and we have a forward PE of 29.
Again, not cheap, but nowhere near any kind of Depression level.
The issue is there are still EARNINGS for the SP 500 even after a 20% or more decline in GDP!
Let’s say the SP 500 stays flat over the next 24 months but earnings go back to Yardeni’s 2019 estimate of 163. Where does that put the PE ratio? At 16.11, which, of course, is right in line with historic norms.
However, not to mention the current 10 Year Treasury yield is all of .67% would be silly. Investing is always about choosing the most efficient use of your capital.
There are competing investment opportunities for your hard earned money. Stocks are just one. But bonds, government bonds in particularly, real estate, gold, cash, paying down debt are others.
(Investing in one’s own business seems to be an afterthought for many. But man oh man, do I wish more people would pursue that path. A society of entrepreneurs is inherently a FREE society and will likely remain so.)
You have to choose among your investing options. Pay down your debt, buy government bonds, investing in real estate, going to the bank or staying in stocks. What looks best to you?
Well, for me, as is always the case, it’s being an owner, a very small owner I recognize, of the best companies in the world, the companies I frequent EVERY SINGLE DAY as do you. As their earnings get back to normal, once the insanity of the Coronavirus dissipates, they will profit and I will too.
This is my belief. It’s not a fact. I can not prove this will happen. But I believe it will and as such I remain a very confident investor in the best companies in the world. Because to me, there is no alternative.
That’s my $.02. You are welcome to disagree. I don’t care if you do frankly. It’s YOUR money. Do with it as you must.
* There are those who say the Imperial College folks only used the 2.2 million if we did nothing…but because we are doing something that number is no longer accurate. They say this in defense of the scaremongering.
However, these defenders obviously did not read what the Imperial College actually said.. so here you go.
“Social distancing of the entire US population, isolation of anyone infected with coronavirus and quarantines for their household members may be the only way to stem the pandemic – and these measures may need to be in place for 18 months, a new study suggests.
Researchers at Imperial College London say that if the whole population doesn’t hunker down, between 1.1 million and 1.2 million Americans will likely die of coronavirus, even if they are treated.
Their study, published Monday, predicts how the coronavirus pandemic is likely to pan out, depending on how the US and UK respond.
If the US and UK did nothing, they estimate that 81 percent of each population would become infected, and 2.2 million Americans would die, along with 510,000 Britons.”
NOTE – quarantines need to be in place for 18 months is literally what they said. NO ONE is saying quarantine 18 months. And yet, somehow, the 2.2 million number as well as the 500k UK numbers have been DRASTICALLY reduced.
Interesting, is it not?