Wow, what a nice market rally last week, especially on Friday. For the third straight week, the US market indices rose, with the Dow, NASDAQ and S&P 500 rising 6.8%, 3.4%, and 5.0%, respectively. The biggest and most surprising jump in the markets occurred on Friday, when the May jobs report was announced. The consensus of economists were expecting 7.5 million jobs lost and an unemployment rate of 19%. Meanwhile, the Bureau of Labor Statistics (BLS) report showed that 2.5 million jobs were GAINED, with an unemployment rate of “only” 13.3%. This came as a huge surprise, and the markets rocketed on Friday. In fact, the NASDAQ reached its peak from Feb 19 prior to COVID, while the S&P 500 remains about 5% below its peak on that date. For the year, the NASDAQ is up almost 10%, while the Dow and S&P 500 are approaching positive territory.
As you may recall from our correspondence a few weeks ago, we believed that the markets were becoming over valued, and they have subsequently risen nearly 10% since that proclamation. If the S&P 500 were to have the same earnings as 2019 over the next 12 months, then it would have a corresponding forward PE ratio of 20, which is more than 20% higher than the 25-year historical average. With the jobless rate at record high numbers since the depression, and many sectors of the economy still reeling from the pandemic (particularly energy, leisure and hospitality), it is unlikely that the earnings for the next 12 months will equal those of 2019. Thus, it seems clear that the markets are currently over priced. In short, the fundamentals don’t seem to warrant the lofty US market levels at this time. As a result of this, we are making revisions to our client portfolios today to take some of the profits resulting from our equity re-purchase on March 27, and reducing the equity exposure again.