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Author Topic: US Economics, the stock market , and other investment/savings strategies  (Read 247281 times)
Power User
Posts: 41061

« Reply #1250 on: August 08, 2017, 11:41:03 AM »

In the words of Scott Grannis, upon my forwarding that to him:

"Yes. And it’s shocking: in 10 years credit card debt outstanding has managed to increase by a whopping $1 billion! In inflation adjusted terms it has fallen by 10%. Relative to nominal GDP it has fallen by almost 25%. The sky is falling!"
Power User
Posts: 41061

« Reply #1251 on: August 11, 2017, 02:57:36 AM »

Are Stock Prices Dangerously High? It Depends How You Look at It
These three P/E measurements are alarming. So why hasn’t it mattered?
Each of the major P/E measures is currently higher than its long-term average. Still, the market hit its latest high on Friday.
Each of the major P/E measures is currently higher than its long-term average. Still, the market hit its latest high on Friday. Illustration: Davide Bonazzi for The Wall Street Journal
By Jeff Brown
Aug. 6, 2017 10:13 p.m. ET

U.S. stocks have set record after record this year, pleasing investors who might have expected a postelection slump. But have prices soared to levels that are too risky?

Just as a 50-degree day is cool in August and warm in January, share prices can look high or low depending on the frame of reference. Still, by almost any standard, share prices are indeed high today—sobering for anyone with a serious stake in the market. Consider the three most popular measures: trailing price-to-earnings ratio, forward P/E ratio and cyclically adjusted P/E ratio.

“Each of the measures is currently higher than its long-term average, prompting many market analysts to predict an impending market decline,” says Brandon Thomas, co-founder and chief investment officer at Envestnet , ENV -3.70% a Chicago-based research and advice provider for financial advisers.

Yet some experts make a case that stocks are not overpriced by important measures and will continue to rise. What’s an investor to do?

Here’s a look at what the top barometers are showing—and why stocks continue to defy them—along with the pros’ arguments about what comes next.

• Trailing P/E Ratio: The classic price-to-earnings ratio, or P/E, looks at the current price divided by the company’s total earnings for the past 12 months.

Today, the P/E for the stocks in the S&P 500 index is about 24, meaning investors pay $24 for every $1 in corporate earnings. That’s quite high compared with the historical average of about 15 or 16, but not so high compared with some periods of crisis in the past—more than 40 around the dot-com bubble and above 100 after the financial crisis broke. To return to average, prices would have to tumble or earnings skyrocket.

Some experts note, however, that it isn’t unusual, or particularly risky, for the P/E to be somewhat higher than average when interest rates and inflation are unusually low. If you’ll earn only a tad over 2% on a 10-year Treasury note, paying $50 for every $1 in interest income, why not pay 24 times earnings on a stock? That would be a 4% earnings yield (earnings divided by price). Also, a low earnings yield is easier to stomach if little will be lost to inflation.

Andrew Kleis, co-founder of Insight Wealth Group, a wealth-management firm in West Des Moines, Iowa, says that “in times of incredibly low interest rates, like today and the last several years, investors put their money into the equities markets because they believe that is their best opportunity for risk-adjusted returns. That drives up P/E ratios. It’s happened before, and it’s happening again.”

This view assumes investors own stocks to share in current or future earnings, even though not all earnings are paid out as dividends. Undistributed earnings used for plant expansion, research and development or stock buybacks should boost the share price.

• Forward P/E: For another look, many experts use a P/E based on projected or forecast earnings, usually from company estimates and a consensus among analysts. Because many analysts are predicting earnings will grow in the near and medium term, this view produces a P/E a little less frightening—currently about 19 for the S&P 500, close to its long-term average.

Jim Tierney, chief investment officer for concentrated U.S. growth equities at AllianceBernstein asset management in New York, says “forward earnings are what we care about the most,” and notes that Wall Street analysts expect healthy earnings gains, producing a forward P/E just shy of 19 this year and close to 17 in 2018. “A bit elevated, but not excessive in a world where the 10-year Treasury as at 2.37%,” Mr. Tierney says.

Of course, a forward-looking P/E can be off if earnings later come in higher or lower than expected. Earnings estimates sometimes have a bit of wishful thinking, and experts say many analysts currently assume earnings will be boosted by a big Republican corporate-tax cut.

Craig Birk, executive vice president of portfolio management at Personal Capital, an investment-management firm in San Carlos, Calif., says he prefers trailing P/E because it relies on established facts. “Forward-looking P/E is also useful, but it must be taken in the context that earnings projections tend to change meaningfully,” Mr. Birk says.

• CAPE: Robert Shiller, the Yale economist known for his book “Irrational Exuberance,” which warned of price bubbles in stocks and housing, devised a different approach to reduce distortions from short-term factors. His “cyclically adjusted price-to-earnings ratio,” or CAPE, divides the S&P 500’s current level by the average of 10 years of earnings adjusted for inflation.

That produces a frightening figure—a P/E today around 30, matching the level on Black Tuesday in 1929, and nearly double the long-term average of about 17 (but still below the peak of nearly 45 in 2000).

While CAPE is less volatile than the other two P/E gauges, some experts caution that it can be misleading at times. Right now, the 10-year earnings average is dragged down by the poor results during the financial crisis, pushing the CAPE ratio up.

Steve Violin, senior vice president and portfolio manager, F.L. Putnam Investment Management in Wellesley, Mass., prefers a CAPE using a five-year earnings average instead of 10, feeling it captures the current business climate and avoids distortions from events too far back to matter.

“A five-year CAPE ratio tends to be reasonably stable by avoiding estimates and smoothing out annual fluctuation,” he says. It’s currently at 23.6, compared with about 18 over the long term.
How long will this last?

A look at the S&P’s components shows that P/Es vary, with some stocks riskier than others—and demonstrates that no gauge can provide a simple view by itself of what’s going on.

Mr. Kleis notes, for example, that the average price of the S&P 500 is driven up by the 100 largest stocks in the index, with the remaining 400 trading closer to their historical P/E levels. “We know that investors have invested [their money] largely in the big, popular names they know and love,” he says. Because the index is based on market weight (stock price times number of shares), the top 100 make up 65% of the index’s value and have a disproportionate effect, he says.

Debating what various gauges really mean at any given moment is an endless process that always has some experts screaming that the sky is about to fall and others saying, “What, me worry?”

The important point today is that all the most popular barometers say share prices are high.
Mr. Violin notes, though, that valuation measures like P/E ratios are only part of the picture and need to be seen alongside measures of profit growth and financial strength. For that, he recommends zeroing in on individual companies. “It’s hard to use valuation ratios as a timing mechanism on their own,” he says. “Elevated stock-market valuations can persist for extended periods as they are sometimes justified.”

P/E ratios have been above average for years, and investors who dumped stocks as soon as they started to look high would have missed huge gains. “Stock valuations are elevated in aggregate, but economic and profit growth has justified these valuations so far,” Mr. Violin says. “This trend looks like it could persist, especially if interest rates remain low.”

Mr. Thomas says that despite high P/Es, the market is currently a “Goldilocks environment”—just right—due to low inflation and forecasts for higher corporate earnings. Though rising interest rates are traditionally damaging to stocks, Mr. Thomas believes rates are going up slowly enough for the markets to digest without much harm.

“Stock prices are at record highs for a reason,” he says, “and that is an expectation of improving earnings growth going forward. Many analysts are forecasting an acceleration in earnings growth as a result of an expected tax cut.”

Of course, things can go wrong. With the turmoil in Washington, for example, tax cuts are far from guaranteed.

Mr. Brown is a writer in Livingston, Mont. He can be reached at
Power User
Posts: 41061

« Reply #1252 on: September 14, 2017, 11:54:41 AM »

The Consumer Price Index Rose 0.4% in August To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 9/14/2017

The Consumer Price Index (CPI) rose 0.4% in August, coming in above the consensus expected increase of 0.3%. The CPI is up 1.9% from a year ago.

"Cash" inflation (which excludes the government's estimate of what homeowners would charge themselves for rent) rose 0.4% in August and is up 1.5% in the past year.

Energy prices rose 2.8% in August, while food prices rose 0.1%. The "core" CPI, which excludes food and energy, increased 0.2% in August, matching consensus expectations. Core prices are up 1.7% versus a year ago.

Real average hourly earnings – the cash earnings of all workers, adjusted for inflation – declined 0.3% in August but are up 0.6% in the past year. Real average weekly earnings are up 0.9% in the past year.

Implications: Consumer price inflation in August was the hottest for any month since January, with prices rising 0.4%. But, between Hurricanes Harvey and Irma, we're going to have to wait a couple of months to figure out whether there has been a shift in the underlying trend. The increase in prices in August was led by gasoline and housing costs. We're certain to see more upward pressure from gas prices in September as Harvey hit late in August, and so only affected prices for a small part of the month. In the past year, consumer prices are up 1.9%. This is below the Federal Reserve's 2% target, and so some are saying the Fed should hold off on raising rates in December. But consumer prices were up only 0.2% in the year ending in August 2015 and up 1.1% in the year ending August 2016, so seeing through temporary fluctuations, we think inflation has remained in a rising trend. "Core" consumer prices, which exclude food and energy, rose 0.2% in August and are up 1.7% from a year ago. A closer look at core prices shows a handful of goods that are keeping that measure below the 2% inflation target. Cellphone service prices have declined an unusually large 13.2% in the past year, while major household appliances are down 3.9% and vehicle costs are falling. For the consumer, these falling prices - which are the result of technological improvements and competition – plus rising wages mean increased spending power on all other goods. We still expect inflation to trend towards 2%+ in the medium term, and don't think the gains to consumers from falling prices in select areas are reason for concern or a justification for the Fed to hold off on a steady path of rising rates. A week ago, the futures market put the odds of a December rate hike at only 22%; now those odds are up to 47%. We think they should be more like 65%. The most disappointing news in today's report is that real average hourly earnings declined 0.3% in August. However, these earnings are up 0.6% over the past year. On the jobs front, initial claims for unemployment benefits declined 14,000 last week to 284,000. The recovery from Harvey should keep exerting downward pressure on claims over the next couple of weeks. Unfortunately, Irma will likely exert even more powerful upward pressure in the near term, so next week's report in claims should rise to about 300,000. After that, claims should drop over the following few weeks back to about 240,000, where it was before the hurricanes. In the meantime, continuing claims for unemployment benefits fell 7,000 to 1.94 million. Plugging all this data into our models suggests payroll gains will be muted for September, but then bounce back in the fourth quarter of the year.
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