Big Waves, But A Dead Calm

It's been awhile since my last post and I haven't taken any investment actions in that time. Here's why.

We've found ourselves in a bit of a market trough with the S&P 500 index trading (albeit with volatility) between roughly 1250 and 1350 since the beginning of the year. In my last post I indicated the swing-point on my investment decisions was 1250 based on my tempered forecast of global earnings rates for the year ahead. I had parred back some holdings and continue to sit on a pile of cash earning very little.

In fact the only bright point about today's market environment is the low interest rates being offered by banks, which I found too attractive to pass up. We're refinancing our house yet again and saving hundreds in monthly mortgage expense. If you haven't already, and sit with a rate north of 4.5%, I'd suggest you look into it.

The market is currently forecasting a return to growth in the 12 months ahead, according to the consensus S&P 500 earnings forecast for U.S. companies. That makes the S&P index of 1354 roughly valued at 13 times forward operating earnings, which is considerably less than the long-term average of 17, which would put the S&P index closer to 1700. So why am I not excited about this?

Well first of all, I'm not in the camp that U.S. earnings growth will surge to 4% in the second and again in the third quarters of this year. I'm factoring in much more conservative estimates. Second of all, I'm not expecting the market to trade anywhere near the mean P/E ratio, given uncertainty in Europe, U.S. elections, jobs, the possibility of huge tax breaks not being extended next year, global political tensions . . . the list goes on.

Here's where I'm at. I'm thinking flat to slightly higher earnings ahead. I don't see the 4% growth analysts are forecasting. For my money, I'm thinking S&P 500 component earnings of $94 for the twelve months ahead. I'm also going to stick with a cautious multiple of 14 on my estimate, which places the S&P index at about 1320.

 It's up from my previous view, based on some strength in early second quarter earnings reports. But remains below the current market. So below 1300, I make look to dip my toes back in the waters with a quick exit strategy in mind. Times like this I wish I took some surfing lessons.