Get Ready for an S&P Market Meltdown

It was a relatively quiet day on the stock market. The S&P500 backed off a little, but it’s had a pretty good run lately. We’ve been telling our subscribers that the market is set up for either a meltdown or a melt-up. We’re sitting in the meltdown camp.

The S&P500’s rally back towards the July/August highs appears to lack conviction and momentum. It’s pretty much accepted on Wall Street that the Federal Reserve will start its ‘tapering’ campaign next week, so this is probably giving stock market bulls pause for thought. That is, if QE was largely responsible for the market’s five year, 150% price rally, then maybe it’s a bit much to expect more of the same with less QE.

Keep in mind that corporate earnings in the US are no longer growing. Actually they haven’t grown in a while. According to this table, sourced from S&P data, the last quarter of positive earnings growth for S&P500 companies was June 2012, where it registered an annualised growth rate of 4.83%.

Since then earnings growth has stalled, and for the latest data (to March 2013) annualised earnings actually declined at a 0.95% rate.

So since June 2012, the market has relied on ‘multiple expansion’ to keep heading higher. That is, the price paid for those stagnant earnings must increase to keep stock markets elevated. And when we look at this table, that’s exactly what we see.

In July 2012, the S&P500’s price-to-earnings ratio was 15.55. The most recent reading is 19.20. That represents a ‘multiple expansion’ of 23.5%. And how much has the S&P500 increased over that time? 21.5%. Add in a few percentage points in earnings decline and there you have it. The stock market’s rally since late 2012 is all down to a confidence inspired multiple expansion.

Confidence in what though? The Fed? It’s waving the white flag and pulling back from its QE theory. Confidence in earnings growth? Earnings have gone nowhere for nearly a year. Confidence in the government? C’mon…

In a sign of just how low the Obama administration has sunk, at least in terms of foreign policy, you’ve got Vladimir Putin playing the peace loving hippy, writing in the New York Times imploring the US to stick with the UN and work to seek a peaceful proposal to the Syrian conflict.

‘The potential strike by the United States against Syria, despite strong opposition from many countries and major political and religious leaders, including the Pope, will result in more innocent victims and escalation, potentially spreading the conflict far beyond Syria’s borders.’

We’re glad Putin seems so concerned about the Syrian people’s fate. And while he did point out that chemical weapons were more likely used not by the Syrian government but by the rebels seeking to bring the US into the war, he made no mention of gas or pipelines. Don’t mention the war, Vlad.

We’ll wrap up the week with a look at the Aussie jobs numbers. Employment in August fell by 10,800 jobs, on expectations of a 10,000 increase. The unemployment rate edged up to 5.8%. The monthly number doesn’t give you much to go on, but the trend has been toward higher rates of unemployment. In April 2011 the unemployment rate was 4.9%.

That’s roughly when interest rates peaked too. So lower interest rates haven’t managed to stop rising unemployment, but they have sparked a renewed property boom. That should do wonders for Australia’s already abysmal productivity performance. The last thing we need is to have more potentially productive capital going into the already overheated housing market.

Tony Abbott’s got some work to do. There’s some low hanging fruit he can easily pick off, but to get genuine reform happening and get productivity growth back to healthy levels, he’ll have to make some unpopular decisions. Unfortunately, it’s unlikely to happen in his first term of government.

Greg Canavan+
for Markets and Money

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From the Archives…

Emerging Markets Walk The Tapertalk
6-09-2013 – Nick Hubble

House Prices Halve Without a Recession
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How the RBA is Using Low Interest Rates to Destroy Your Wealth
3-09-2013 – Nick Hubble

Is the Stock Market Predicting War?
2-09-2013 – Nick Hubble

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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