Monday, March 18, 2013

Notes & Performance Update for Week of 3/11 - 3/15

With what appears to be negative news again coming out of Europe, combined with the 'bullish' movement in the US equity market since the start of 2013, and our concern that we discussed briefly a couple of weeks ago, we thought to review valuation of the S&P 500 index again. 

Based on 2013 EPS projections, a 10.58% 5-year projected annual EPS growth (as provided by S&P), and our belief that this market's fair value would be at a forward P/E that would generate a PEG of 1.0, we think a P/E of 10.58 would be a good start to get an idea about S&P 500's fair value.  This would give us 1176.53, 24.6% below where the index closed at on Friday.  Of course this appears too low, which could be due to the fact that our P/E multiple does not take the index's dividend yield into account.  So, with a dividend yield of 2.15%, 12.73x 2013 EPS could also be used.  This gives us a value of 1415.76 for the S&P 500 index, 9.3% below Friday's close.  We could take the mid-point within this range, 1296.14, which is 17.0% below Friday's close.  Right now the S&P 500 is valued at 14.03x 2013 EPS estimates, representing a PEG of 1.33 without dividend yield and 1.10 including the dividend yield. 

Of course, the Fed's continuing QE policy does create some type of premium on the value of this index.  However, given the latest higher than expected CPI (even if it was the headline CPI), improvement in the labor market but the still stagnant wage growth, the Fed is likely beginning to work on an exit strategy.  It will certainly give the equity market a 'heads-up' before putting such strategy into action, hoping to minimize any negative reaction in the market.   

As of 2:15am (EST), the S&P 500 future is down 1.35%.  Whether the US equity market will react this badly to the news out of Europe after it opens, remains to be seen.  In addition, some important real-estate numbers are scheduled to be released this week.  Any positive surprise could help lower impact of the dilemmas faced in Europe on the equity market.  On Wednesday, the Fed will not only release its FOMC meeting notes, but also its first official forecasts this year.  Given the mostly better than expected economic data during the last couple of months, the Fed's projections could please the market.  However, even if all of this upcoming news turns out to be positive, we continue to believe the market has gone up too much and too fast, as we mentioned a couple of weeks ago. 

No comments:

Post a Comment