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* 60% All Country World Index/40% Barclays Aggregate
Volatility remained elevated throughout the month of September as markets were whipsawed by contradicting rumors about developments in the ever-evolving European sovereign debt crisis. Financial shares were hit extremely hard throughout the month, unearthing memories of the 2008 financial crisis.
Volatility remained elevated throughout the month of September as markets were whipsawed by contradicting rumors about developments in the ever-evolving European sovereign debt crisis. Financial shares were hit extremely hard throughout the month, unearthing memories of the 2008 financial crisis.
It can be argued that the European debt crisis has been around long enough to be discounted into current market thinking. But increasingly a new worry is growing…the prospect of a domestic recession. Prognostications for the onslaught of a recession are mounting by the day and now appear to be impacting market valuations.
There is no debating that the economy is, has been and will likely remain weak until the macro environment becomes clearer. Recent evidence, however, does not appear to support the notion that the economy is on the brink of contraction. In fact, current data suggests that the economy has withstood the severe headwinds of late and may even be accelerating from the sluggish pace of growth seen in the first half of the year. In addition, the declines in commodity prices (particularly oil) should help to boost disposable incomes at the margin. We shouldn’t discount the future impact of sharp market declines on business and consumer confidence. Yet to-date, we have not seen the broad based contraction associated with a full blown recession.
Thankfully, we are on the cusp of the third quarter earnings season which should re-focus attention away from the macro headlines and back to the fundamentals of corporate profit growth (at least for a while). Investors will undoubtedly be fixated on management’s forward looking guidance, which will provide valuable insights into the real economy. Bottom-up S&P 500 consensus estimates for 2011 remain at $95.51, with $105.21 expected in 2012. This equates to roughly 10% year-over-year earnings growth.
As we have noted in previous commentaries, earnings estimates have been too high and will need to come down for 2012. The question is by how much? A recent study by Barclays Capital notes that, on average, S&P 500 earnings have declined by -15.7% during recessionary periods dating back to World War II. Recent declines have been more pronounced, with earnings falling -31.6% in 2001 and -56.7% in the latest recession ending in 2009. The average P/E multiple during the eleven recessions studied was 13.64.
With current 2011 earnings estimates at roughly $96/share and assuming the average decline in earnings of -16% puts S&P 500 earnings at $80.64/share. Applying the average recessionary multiple of 13.64 yields an implied level of the S&P 500 at 1100 (roughly 3% below the closing price as of 9/30/11). While markets appear to have priced in the prospect of recession in 2012, economic data has yet to support this view. If third quarter earnings reports yield a more positive tone, valuations are beginning to look appealing.
Clearly we are at an important inflection point. Volatility across a broad array of asset classes has shaken investor confidence. Domestic economic growth has remained anemic and other economies are beginning to show signs of slowing (most notably China). Confidence in political leadership around the globe continues to erode. From a contrarian standpoint, this is the time to get interested. If the pessimism pendulum continues to swing to extremes, compelling opportunities may soon emerge across a variety of asset classes.
This communication is not an offer or solicitation with respect to the purchase or sale of any security and is for informational purposes only. Information contained herein has been derived from sources believed to be reliable, but CAPROCK makes no representations as to its accuracy or completeness. Investment in securities involves the risk of loss. Past performance is no guarantee of future returns.
September Market Commentary
Thursday, Sep 1, 2011 Global equity markets were down substantially in the month of September driven by continued fears of a Eurozone banking collapse and heightened concerns about global economic growth prospects. Fixed income markets were once again the beneficiary of equity market declines, as investors drove Treasury yields to record lows. Market performance for the month is summarized in the following table:| Index | September | YTD | Index | September | YTD |
| S&P 500 (Total Return) | -7.03% | -8.68% | All Country World Index (Net) | -9.51% | -13.62% |
| MSCI EAFE (Net) | -9.53% | -14.98% | Barclays Aggregate | +0.73% | +6.65% |
| MSCI Emerging Markets (Net) | -14.58% | -21.88% | 60/40 Blend* | -5.42% | -5.75% |
Volatility remained elevated throughout the month of September as markets were whipsawed by contradicting rumors about developments in the ever-evolving European sovereign debt crisis. Financial shares were hit extremely hard throughout the month, unearthing memories of the 2008 financial crisis.
Volatility remained elevated throughout the month of September as markets were whipsawed by contradicting rumors about developments in the ever-evolving European sovereign debt crisis. Financial shares were hit extremely hard throughout the month, unearthing memories of the 2008 financial crisis.
It can be argued that the European debt crisis has been around long enough to be discounted into current market thinking. But increasingly a new worry is growing…the prospect of a domestic recession. Prognostications for the onslaught of a recession are mounting by the day and now appear to be impacting market valuations.
There is no debating that the economy is, has been and will likely remain weak until the macro environment becomes clearer. Recent evidence, however, does not appear to support the notion that the economy is on the brink of contraction. In fact, current data suggests that the economy has withstood the severe headwinds of late and may even be accelerating from the sluggish pace of growth seen in the first half of the year. In addition, the declines in commodity prices (particularly oil) should help to boost disposable incomes at the margin. We shouldn’t discount the future impact of sharp market declines on business and consumer confidence. Yet to-date, we have not seen the broad based contraction associated with a full blown recession.
Thankfully, we are on the cusp of the third quarter earnings season which should re-focus attention away from the macro headlines and back to the fundamentals of corporate profit growth (at least for a while). Investors will undoubtedly be fixated on management’s forward looking guidance, which will provide valuable insights into the real economy. Bottom-up S&P 500 consensus estimates for 2011 remain at $95.51, with $105.21 expected in 2012. This equates to roughly 10% year-over-year earnings growth.
As we have noted in previous commentaries, earnings estimates have been too high and will need to come down for 2012. The question is by how much? A recent study by Barclays Capital notes that, on average, S&P 500 earnings have declined by -15.7% during recessionary periods dating back to World War II. Recent declines have been more pronounced, with earnings falling -31.6% in 2001 and -56.7% in the latest recession ending in 2009. The average P/E multiple during the eleven recessions studied was 13.64.
With current 2011 earnings estimates at roughly $96/share and assuming the average decline in earnings of -16% puts S&P 500 earnings at $80.64/share. Applying the average recessionary multiple of 13.64 yields an implied level of the S&P 500 at 1100 (roughly 3% below the closing price as of 9/30/11). While markets appear to have priced in the prospect of recession in 2012, economic data has yet to support this view. If third quarter earnings reports yield a more positive tone, valuations are beginning to look appealing.
Clearly we are at an important inflection point. Volatility across a broad array of asset classes has shaken investor confidence. Domestic economic growth has remained anemic and other economies are beginning to show signs of slowing (most notably China). Confidence in political leadership around the globe continues to erode. From a contrarian standpoint, this is the time to get interested. If the pessimism pendulum continues to swing to extremes, compelling opportunities may soon emerge across a variety of asset classes.
This communication is not an offer or solicitation with respect to the purchase or sale of any security and is for informational purposes only. Information contained herein has been derived from sources believed to be reliable, but CAPROCK makes no representations as to its accuracy or completeness. Investment in securities involves the risk of loss. Past performance is no guarantee of future returns.
