So far, earnings season has been lackluster. Although we haven't heard from enough U.S. companies to draw conclusions, reports from heavy-hitters like Wal-Mart [WMT] and Yum Brands [YUM] show that many companies are cautious about growth prospects. Economic developments in China and volatility abroad are making projections difficult, but companies expect challenges for growth to continue.[5]
This week is light on U.S. economic data, so markets will likely focus on earnings reports and key economic data out of China. We are expecting more volatility as earnings season progresses and investors digest fourth-quarter forecasts. From a technical perspective we are right at the limit for a lot of resistance above. The 100 and 200 day moving averages are right overhead at 2040 and 2060 on the S&P 500.
From a 30,000 foot perspective the cyclically adjusted P/E of the market is about 25. Even just seeing that decline to 21 (which is about the level it declined to in 2003) would mean a decline of over 20% in the S&P 500. In May, Janet Yellen indicated she thought valuations in the market had gotten high. They peaked around 27 recently. This doesn't mean valuations won't go higher. However, eventually things tend to revert to the mean. The long term average for P/E is around 15. We won't bother discussing what that market would look like.
We have been in a secular (long term) bear market since the year 2000. We have a had cyclical bulls and bears since then. One can easily say we have been in a cyclical bull since 2009. We may be witnessing the end of the cyclical bull. Ed Easterling, of Crestmont Research, points out it typically takes P/E going below 10 before we generally see the end of a secular bear and the start of a secular bull market. You can see a great picture of this by clicking HERE. Take a minute and take a look. Its well worth it.
In closing, I'm not convinced this market doesn't have some work to do to the downside. Mediocre to poor earnings coupled with slowing global growth and an upcoming presidential election all add to the uncertainty casserole that most markets don't like. The variable here is really the Fed and whether they decide to pull a rabbit out of their hat and manipulate the markets some more or to discharge the patient and allow him to get better on his own. Stay tuned.
ECONOMIC CALENDAR: Monday: Housing Market Index
Tuesday: Housing Starts
Wednesday: EIA Petroleum Status Report
Thursday: Jobless Claims, Existing Home Sales
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