Market Commentary, 02/09/16
The New Year has not been kind to the market, as the Dow is down 8% YTD and the S&P 500 is off 9.3% (as of yesterday, 02/08/2016). Further, the Dow is down 13% from its 05/20/2015 high, the S&P 500 is down 13.2% from its 05/21/2015 high and the Nasdaq is down 18% from its 07/20/2015 high. The significance of these declines is that a 20% decline from the highs signals a Bear Market. These declines from the highs and YTD may mean that the market is breaking down as is indicated by several fundamental measures.
The following chart shows the six most widely used valuation measures and their comparison to a bull market peak for the past 100 years. Even with the market decline in the past few weeks, the measures are at 70%-90% of prior bull market peaks.
P/E Ratio – Price of a stock divided by the earnings
CAPE (Cyclically Adjusted P/E) Ratio – Price of a stock divided by average earning for the last 10 years
Dividend Yield – Current dividend divided by the current stock price
Price to Book Ratio – Price of stock divided by total assets less intangible assets and liabilities
Price to Sales Ratio – Price of stock divided by the revenue
q-Ratio – Total price of the market divided by the replacement cost of all companies in the market
In short, for the past 100 years, 70% of the time when P/E ratios reach their current level the stock market has peaked. Likewise, over 80% of the time that the Dividend Yield reaches the current level, a bull market has reached a peak. The culmination of all six ratios at the same time with the same result indicates the market is probably overvalued and that we are very likely past the peak.
Recent seesaw action in the price of oil, the decline in the Chinese Stock Market (down 21% YTD), and January’s weak job report have been daily reported as the causes of market up days and down days for the past few weeks. However, these factors should probably be seen as catalysts or triggers with market fundamentals mentioned above being the more significant issues.
On January 18, based on these market indicators, we moved a significant portion of your portfolio to more stable, less volatile holdings. Accordingly, your portfolio should be able to absorb negative market action. We will continue to monitor the situation in an effort to determine the best time to take advantage of lower prices.
Wayne Copelin, CFP®
President, Copelin Financial Advisors, Inc.
514 Brooks Street
Sugar Land, TX 77478
Phone (281) 240-2902
Fax: (281) 240-2856
Securities offered through ProEquities, Inc., a Registered Broker-Dealer and Member FINRA & SIPC Advisory Services offered through Harvest Investment Services, LLC., a Registered Investment Advisor Copelin Financial Advisors, Inc and Harvest Investment Services, LLC are independent of ProEquities, Inc.