The indecision of the markets has continued through April. The S&P 500 was up fractionally while the Barclay’s Aggregate Bond was down fractionally. The Dow Jones Industrial Index has been fighting to stay above 18,000 since last December and has yet to maintain that milestone for longer than two consecutive weeks. This 18,000 number is arbitrary, but it is interesting to see just how stagnant stocks have become. The accompanying chart shows the most recent Dow Jones milestones and the length of time it took to cross from one to the next. We are close to five months since first crossing the 18,000 mark and we have yet to make any headway toward 19,000.
As we have stated in various other articles, oil, interest rates, and the strong dollar appear to be the main protagonists slowing the stock advances down. However, in April, we saw oil and the dollar reverse course. The economic data that is used by the Fed to determine interest rate policy is still mixed. Employment data is strong but wage growth is weak. Corporate earnings are doing well, but GDP growth has been inconsistent. For example, 2014 Q3 GDP was 5%, 2014 Q4 was 2.2% and the advanced estimate of 2015 GDP for the 1st quarter was only 0.2%1. This isn’t the trajectory of growth that would accommodate increasing interest rates.
With the markets and the economy not giving us a clear course of action, let’s review the stock market fundamentals. Looking at stock prices compared to corporate earnings (P/E Ratio), we can see that we are a little above the average historical rate. However, we still have another 13% potential price increase (somewhere around 20,000 on the Dow) before we get into historically expensive territory. If earnings strengthen faster than anctipated (helped by lower energy costs perhaps) then we might be seeing even greater potential for stocks in the coming months.
All this is to say that the second half of 2015 should be an interesting one. Let’s enjoy the spring and the summer-like weather that is finally upon us and hope for strong markets ahead.
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