Published Friday, September 10, 2021 at: 6:00 PM EDT
The Standard & Poor’s 500 stock index is priced at about 21 times forward earnings estimates by Wall Street analysts -- a high P/E multiple by historic standards -- but not as high as the peak of the stock-price bubble in 2000, when the price-to-earnings ratio of the S&P 500 peaked at 25. Moreover, things really are different this time.
Bond yields are near a historic low, making the earnings yield of stocks a relatively attractive investment, even though the stock market has been breaking record highs for months. In addition, the stock market valuation model relied on by the Federal Reserve shows stocks are reasonably valued compared to bonds.
The Delta Variant is making the stock market jittery and has tempered the red-hot economic growth expectations, but some experts, including Dr. Scott Gottlieb, former head of the U.S. Food And Drug Administration under the Trump Administration, have predicted that “this is the final wave.” In addition, the CDC’s latest Covid model composite now suggests that U.S. cases are peaking.
On the left are this week’s “ensemble forecasts” of new reported COVID-19 cases over the next four weeks from 25 modeling groups reporting to the CDC, predictions showing a range from 430,000 to 1,520,000 new cases are likely to be reported in the week ending October 2, 2021.
In the chart on the right, the black line shows the number of new COVID-19 cases reported in the United States each week from July 3 through September 4, and the dark red line is the likely forecast for new cases over the next four weeks, through October 2. The decline expected in new cases means the nation could be turning the corner in the fight against the pandemic.
Keep in mind, these forecasts do not reflect the impact of yesterday’s action by President Joseph R. Biden, Jr. to mandate vaccination of all federal employees, and giving a choice of vaccination or weekly testing to all employees of companies with 100 or more employees – about two-thirds of the U.S. labor force.
Models make various assumptions about the levels of social distancing and other interventions, which may not reflect recent changes in behavior. See model descriptions below for details on the assumptions and methods used to produce the forecasts.
In recent weeks, more reported cases have fallen outside of the forecasted prediction intervals than expected. This suggests that current forecast prediction intervals may not capture the full range of uncertainty. Because of this, case forecasts for the coming weeks should be interpreted with caution.
The Standard & Poor’s 500 stock index closed this Friday at 4,458.58, losing about eight tenths of 1%. For the week, it lost -1.7%. Since the March 23, 2020, Covid bear market low reached 18 months ago, the index has appreciated an astounding +66.34%.
Investors should always try to remember that stocks are one component of a broadly diversified portfolio. It is wise to think of the S&P 500 as the growth engine of a portfolio that is more volatile than most other investments in a diversified portfolio.
With price-earnings valuations under scrutiny, fear of the Covid virus is making some stock investors nervous, and with the new vaccination measures going into effect in the weeks ahead, the economic situation is more uncertain and stocks are subject to a correction of 10% or more. However, no recession is in the forecast and economic fundamentals have been very strong.
Nothing contained herein is to be considered a solicitation, research material, an investment recommendation, or advice of any kind, and it is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Tax advice always depends on your particular personal situation and preferences. You should consult the appropriate financial professional regarding your specific circumstances.
The material represents an assessment of financial, economic and tax law at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions.
This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.
This article was written by a professional financial journalist for McCarthy Asset Management, Inc and is not intended as legal or investment advice.