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The Good, the Bad, and the Unstable

The US stock markets fared reasonably well last week, as the Dow (+1.1%), NASDAQ (+3.7%), and S&P 500 (+1.9%) gained for the week.  Diversified bond funds also gained about 0.5%, so diversified portfolios continued to extend their modest gains for the month of June, despite that horrific set of days a couple weeks ago.  Retail sales from May were reported earlier in the week, and demonstrated record gains.  Of course, that was on the heels of April when many stores were shut down due to COVID.  According to data provided by John Hancock Investments, sales in May were still down 8% from February.  Despite that sales are still down from February, the recovery from the abyss is welcome sight to sore eyes.  Bonds also continued to rally as the Fed began its bond buying activity a couple weeks ago, and providing support to bonds overall.  In fact, most diversified bond funds (exclusive of high yield bonds) are now up since the start of COVID, erasing losses of an astounding 10% in a short 3-week period in March.

 

Two weeks ago, we claimed that the markets were over valued, and referenced PE ratios being too high.  Well, if you’re visual and enjoy charts like I do, see the ones I gathered from Yahoo Finance this morning and provided below.  The first chart shows PE ratios and the S&P 500 over the past 10 years, and you can see that the PE ratios (suggesting stock prices may be too high) have rocketed in the past couple months off their lows when the market tanked in late March.  The PE ratios are up near 23, compared to the 5-year and 10-year averages of roughly 17 and 15, respectively.  Meanwhile, the 2nd chart shows the rise of the S&P 500 alongside the sudden drop and flattening of the underlying earnings projections of the S&P 500 stocks.  Therefore, we continue to believe that the stock markets remain over valued, particularly in the face of some potential risks that could derail the markets, such as a return of the Coronavirus, tensions with China, and the uncertainty of the election, just to name a few.





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