Recap and Week Ahead | Equity Rally
It’s so easy to lump everyone into a category called “investors” and view them as playing on the same field called “markets.” But people play wildly different games. - Morgan Housel
Last week's market recap:
- The S&P 500 closed the week up 2.48%. Year-to-date the index is up 6.11%.
- NASDAQ closed the week up .4.32%. YTD the index is up 11.07%.
- U.S. Aggregate Bond index was up .09% for the week. YTD the index is up 2.99%.
- 10-Year Treasury Rate increased, ending the week at 3.52% up from 3.48% the prior week.
- Fed Funds Target rate is 4.50%
- The 1-Year Treasury is yielding 4.71%
- A 6 Month Treasury is yielding 4.83%
- The 6 month Treasury has a higher yield vs the 1 year and beyond. This is the bond market telling the Fed, “The economy is not strong enough to sustain these higher rates much longer.”
- If your savings account is still under 1%, you may want to find a new savings account.
The week ahead:
- Busy week of earnings: Apple, Amazon, Google, Meta, Ford, Pfizer, UPS, McDonald’s, etc.
- Fed Meeting: 25bps rate hike is expected
- Jobs data: JOLTS, Nonfarm Payrolls
- Manufacturing and Services PMIs – Data measuring the activity level of purchasing managers. Expanding or Contracting?
Is the equity rally sustainable?
Last year, markets were driven by interest rates. This year, markets should be driven by valuations. We’re probably past peak hawkishness as inflation data continues to cool down. The Fed will meet this week and they’re expected to decrease the rate hikes to 25bps. However, the market going higher is counter to what the Fed wants. The Fed’s job of taming inflation gets significantly harder as equities go higher. So.. Is the year-to-date equity rally sustainable? Will the Fed say something to bring equity markets down?
Instead of predicting what Jerome Powell may or may not say, let’s look at the math…
What is the fair value of the S&P 500?
(What forward multiple should be applied to the S&P 500?) x (What are the earnings?) = (The level of the S&P 500) We know this variable. It’s currently 4,032.
Mike Wilson from Morgan Stanley presents a bear case…
- 15x multiple x $200 earnings = 3,000 on the S&P 500. That’s a roughly a 25% decline from today’s level. $200 on earnings is far below consensus estimates. He also mentions that during recessions, the multiple could or should be 13x or even lower.
Some extremely bullish analysts are saying…
- 20x multiple x $240 earnings = 4,800 on the S&P. This is roughly 20% higher than today’s level. A 20x multiple with a Fed Funds rate at 4.5% is probably too optimistic.
Today’s market is saying…
- 17.68x multiple x $228 (consensus estimates) = 4,032
This is why expectations matter. Will earnings be better or worse than expected? Will the Fed be more or less aggressive than expected (this changes the multiple)? There is MUCH more that goes into assessing a fair value of equity markets. Remember, a day trader, a Private Equity Firm, and an Endowment Fund with a 100 year time horizon may translate this data with completely different views. However, this is one simple equation (Forward P/E Ratio) that tells you a great deal about what many "investors" are thinking.
Beyond the equity markets, it is extremely important to understand: Fixed Income yields are attractive again. This should provide a solid foundation for "investors" who use diversified portfolios going forward.
Source: JP Morgan
2023 Financial Planning Notes:
- Later age for RMDs
- Bigger contribution limits on retirement accounts
- Higher income limit for Roth IRA contributions
- Increased Standard Deductions
- Higher Marginal Tax Bracket Thresholds
- 529 rollovers to Roth IRAs (requirements need to be met)
- Higher threshold for 0% long-term capital gains
As always, let us know if you have any questions.
CRA Investment Committee
Matt Reynolds CPA, CFP®
Tom Reynolds, CPA
Robert T. Martin, CFA, CFP®
Gordon Shearer Jr., CFP®
Jeff Hilliard, CFP®, CRPC®
Joe McCaffrey, CFP®
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