Dr. Bob Froehlich, senior managing director at Hartford Mutual Funds, regularly communicates his view of market expectations. Despite uninspiring economic results he remains bullish on stocks.
Here is some compelling support for his thinking from his September 29 commentary.
On September 30, 2007—before the market meltdown began—the Standard & Poor’s 500 Index (S&P 500) was at 1,526, with quarterly earnings of $20.87. When the market hit its quarterly bottom on March 31, 2009, the S&P 500 was trading at 797, with quarterly earnings at $10.11. In other words, the market went exactly where earnings took it—namely, down. Over that time frame, earnings were down 51.56 percent and, almost in lockstep, the overall market was down close to the same amount, falling 47.74 percent.
Now let’s fast-forward to the most recent quarterly numbers, as of June 30, 2010. Earnings have recovered from their March 31, 2009 low of $10.11, and as of June 30, 2010, stood at $20.90. So earnings are back above the September 30, 2007 peak of $20.87. What about the market? The S&P 500 as of June 30, 2010 stood at 1,030. So even though quarterly earnings now exceed the September 30, 2007 highs, the overall market is still down 32.5 percent for that same period. If you believe, as I do, that the market goes wherever earnings take it, then our market has a little catching up to do.
Looked at another way, since the lows of March 31, 2009, quarterly earnings for the S&P 500 as of June 30, 2010 are up 106.73 percent. For that same time frame, the overall market is up only 29.18 percent. Remember what’s important: earnings, earnings, and then earnings.
This evidence may be partly responsible for the strong September rally, the best month of September for U.S. stock markets since 1939. We don’t expect the market to continue to rally as sharply, but clearly there is a disconnect that could lead to growth if company earnings continue to meet expectations.
It’s these expectations of future earnings that influence the mood of the market.
Further evidence from Morningstar demonstrates that it’s the largest “blue chip” stocks that are most undervalued. In reviewing performance of companies within the S&P 500, Morningstar shows that returns of the largest companies are significantly behind smaller companies in the index.
Consider this chart that breaks the S&P 500 into deciles by size (market value) and lists year-to-date performance through September 16, 2010.
Do you think there remains a buying opportunity with suitable upside for stocks?
What would make you comfortable that stocks are undervalued?
~ Brooks, Hughes & Jones, Partners in Wealth Management — Gary Brooks, CFP®, Allyn Hughes, CFP®, CLU, ChFC, Nancy Jones, CFP® — Tacoma, WA