Thinking About the S&P 500 (SPY)
A number of people have been emailing me asking me if I am still bullish on the market. The answer is: Yes, I am.
So far in June the S&P 500 is up over 7%, so let’s be grateful after a horrendous May. For the year the S&P 500 is now up 17.7%, and I continue to believe there is more to come.
I think that investors will soon realize that while GDP growth is slowing it is not heading to a recession in 2019 and probably not 2020. If we revert to our steady 2 to 2.5% growth that we witnessed over the past decade, it should be enough to sustain the market, and push it higher, especially with interest rates at current levels.
By the way, I don’t see how anyone can accurately forecast 2020 GDP growth when nobody can seem to forecast 2019 correctly. Think about what investors and economist were saying in December and where we are now.
My conclusion is simple. The world is in a slow patch currently, just look at numbers GDP and PMI’s in Asia and Europe. If we get a trade deal, then China should pick up and that should help the rest of Asia and Europe along. So if anything I think there is more risk to the economy improving than getting worse at this point.
Plus if the Fed does ease, and the ECB eases too, there is going to be a lot of extra money floating around that should help to pick up the pace of business.
Current S&P 500 State
I am impressed by the rally, with an S&P 500 that has continued to grind higher. Overall, my viewpoint on the market longer-term has not changed, and with rates falling so dramatically, I do believe that higher equity prices are on deck.
I am currently, modeling earnings of $164.79 for 2019, which is roughly in line with S&P Dow Jones estimates for $164.64. It leaves the S&P 500 trading at 18 times 2019 numbers. Meanwhile, for 2020 I am modeling earnings of $182.93, while S&P Dow Jones is forecasting $184.68. It gives me a 2020 PE ratio of about 16.1.
When I model 1 standard deviation below the mid-point for 2020, I get earnings of $172.98. That places the S&P 500 at 17 times 2020 estimates.
Again it would suggest that to me that S&P 500 is currently fairly valued in a worst-case scenario. It tells me that there is still more room to go higher on the S&P 500 overall.
At 17 times 2020 earnings of $182.93, I calculate an S&P 500 value of 3,110, about 5.5% higher than the current amount of 2,950.46.
What I also find interesting is that only 67% of the S&P 500 is trading above its 50-day moving average. That is below the previous highs of at least 74%.
We can see something similar when we look at the percent of stocks trading above their 200-day moving average.
So I continue to believe we have further to climb.
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