S&P 500 Rising at Five Times GDP Shows Recovery Priced In
For almost six years, one of the most powerful bull markets on record has coexisted with the weakest economic recovery since World War II. This month’s selloff in stocks shows how much investors want that to change.
In the latest fit of nerves, market volatility soared to a three-year high and the Standard & Poor’s 500 Index dropped as much as 9.8 percent in the 26 days ending Oct. 15. Everything from Ebola toEurope and the Federal Reserve were blamed for the retreat, the fourth to exceed 3 percent this year.
“I don’t think the dispersion can sustain at the level that it did, which is why the market is struggling,” Daniel Genter, who oversees about $4.5 billion as chief executive officer at Los Angeles-based RNC Genter Capital Management, said in a phone interview on Oct. 22.
As quickly as markets lurched, they recovered, with the Chicago Board Options Exchange Volatility Index (VIX) dropping 27 percent last week as the S&P 500 increased 4.1 percent.
Anyone using above-average GDP gains as a signal to buy would have missed the 190 percent advance in the S&P 500 since March 2009 that rivals almost any rally in the past nine decades.
“I don’t think you can find a relationship, a consistent ratio, between economic growth and the stock market,” Laszlo Birinyi, president of Birinyi Associates Inc. in Westport, Connecticut, said in a phone interview.
Throughout the rally, corporate profits have been a better guide than GDP growth for when to buy stocks. With S&P 500 12-month earnings doubling to $103.21 a share since the end of 2009, the index trades at a price-earnings ratio of 19, compared with its average of 25 since 1990, data compiled by Bloomberg and S&P Dow Jones Indices show.
“You can’t do a whole lot more cost cutting and you can’t buy back a whole lot more stock,” David Lafferty, the chief market strategist for Natixis Global Asset Management in Boston, said by phone.
One hazard for investors is shown in valuation gauges tied to revenue. Since global equities bottomed in March 2009, the S&P 500’s price-sales ratio has expanded about three times as fast as price-earnings, rising from 0.7 to 1.8 last month, the highest level in more than a decade.
Source: bloomberg- S&P 500 Rising at Five Times GDP Shows Recovery Priced In
