Sam Stovall, S&P Capital IQ’s chief investment strategist and noted stock market historian, says everyone’s been asking him if the market’s current stratospheric price levels can be justified, especially given rather weak U.S. GDP forecasts.
His answer: definitely, maybe.
He first notes that the pace of the economic recovery has been well below the post-WWII average.
Meanwhile, stock prices have been all over the place, Stovall writes:
Despite this anemic growth in our economy, the S&P 500 increased in price at a swifter pace than it normally did during the first four years of economic recovery since 1949. Normally, the S&P 500 recorded price advances of 12.6%, 10.3%, 4.6% and 1.0% during years 1-4 of economic expansions since the late 1940s, respectively. This time around the S&P 500 posted price advances of 12.1%, 28.1%, 3.1% and 14.3% (through March 22, 2013).
He also looks to the Conference Board’s Leading Economic Indicator for guidance, but finds it cannot tell us much about the future given current conditions:
…the undulation of average P/E ratios during increasing quintiles of year-over-year LEI per cent changes…shows a wide range of observations from as high as 31.9X to as low as 7.8X and an average of 17.6X. What’s more, rather than indicate the tendency for market multiple to rise as this economic indicator improves, the results appear inconsistent to us.
That’s an incredibly wide range of scenarios. Here’s Stovall’s table:
Sam Stovall/S&P Capital IQHis conclusion: we can’t conclude anything:
…the S&P 500 is fairly valued. Yet based on the range of observations since inception, history shows (but does not guarantee) that the market could also experience a substantial amount of P/E expansion – or contraction.
Maybe it goes nowhere.
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