AMERIPRISE FINANCIAL, INC.
It is somewhat remarkable that domestic equity prices surged to a 1.8 percent gain last week. Not even the shocking assault on the U.S. Capitol Building on Wednesday was enough to derail the powerful rally that has been underway since the election in November. Stocks have climbed 17 percent since then, having risen in seven of those ten weeks. Last week's strength came in the wake of the Senate runoff elections in Georgia, which swung control of the Senate to the Democratic Party in a dramatic upset. While it may not always be necessarily true of individual voters, last week's gains were clear evidence that the stock market votes with its pocketbook.
The presumption is that the Democratic Party will be now be more likely to enact at least parts of President-elect Biden's agenda, including more economic stimulus and spending on infrastructure. Democrats will now control the legislative agenda in the Senate. And although many bills will still require 60 votes to pass, the so-called reconciliation process allows for budgetary matters to be passed with a simple majority. Higher taxes, both corporate and on individual in certain brackets, are also part of the Biden agenda.
But investors have chosen to focus on the potential economic impact of more spending, especially once the virus vaccine has been widely distributed and adopted. This is not just a U.S. phenomenon. There has been a torrent of monetary and fiscal stimulus worldwide in an effort to plug the economic gap created by the pandemic. The MSCI All Country World Ex-U.S. index is higher by 24 percent in the past ten weeks in dollar terms, including 3.7 percent last week.
Investors Should Pay Attention to Historically High Valuations
The problem for investors is that stock prices have risen to levels that increasingly appear excessive. And while it is often said that valuation is a poor timing mechanism, it is also often a mistake to ignore evidence of excess. The S&P 500® index currently sits at record highs based on its price-to-earnings (P/E) and price-to-sales ratios. And although the trend is up, the index sits at the highest level relative to its 200-day moving average in over 15 years. On Friday it closed at a technically oversold level. Margin debt is at a record. Certain measures of sentiment are also elevated. Perhaps the starkest example of speculative excess is Bitcoin, which has more than doubled in price in just three weeks.
The forward price to earnings ratio of the S&P 500 for calendar 2021 is currently 23X, based on the expectation that earnings will grow by roughly 22 percent this year. Not until 2022, based on expected earnings growth, does the P/E ratio decline to a more reasonable 20X. Even that level is at the high end of historical experience but can at least be justified on the basis of expectations that the Fed will still be holding the overnight rate at effectively zero and fiscal policy will be doing its part. Both of those conditions appear reasonable, based on what we know today, but current valuations also suggest that stock prices may already reflect a good deal of those expectations.
The Bull Market Likely Hasn't Run its Course, But Stocks May Be Due for a 'Healthy Correction'
None of this is to suggest that the current bull market has run its course. But it does make it more likely, and indeed more welcome for the longer-term investor, that stocks are due for a pull back, or what is often termed a 'healthy correction.' It is difficult to know what might be the catalyst for such a pullback.
But one thing to watch is the yield on the ten-year Treasury note. It has been said many times that part of the attraction of stocks is that, with bond yields so low there is no alternative. And low bond yields elevate the price investors are willing to pay for the future earnings stream of equities. However, last week the yield on the ten-year note surged higher by 21 basis points, rising above 1.00 percent for the first time since March and ending the week at 1.12 percent. How much further this move will run remains to be seen, but at some point, investors will take note, and equities might suddenly look very expensive.
Important Disclosures:
Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
Definitions of individual and sector indices mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor.
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.
Past performance is not a guarantee of future results.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
The presumption is that the Democratic Party will be now be more likely to enact at least parts of President-elect Biden's agenda, including more economic stimulus and spending on infrastructure. Democrats will now control the legislative agenda in the Senate. And although many bills will still require 60 votes to pass, the so-called reconciliation process allows for budgetary matters to be passed with a simple majority. Higher taxes, both corporate and on individual in certain brackets, are also part of the Biden agenda.
But investors have chosen to focus on the potential economic impact of more spending, especially once the virus vaccine has been widely distributed and adopted. This is not just a U.S. phenomenon. There has been a torrent of monetary and fiscal stimulus worldwide in an effort to plug the economic gap created by the pandemic. The MSCI All Country World Ex-U.S. index is higher by 24 percent in the past ten weeks in dollar terms, including 3.7 percent last week.
Investors Should Pay Attention to Historically High Valuations
The problem for investors is that stock prices have risen to levels that increasingly appear excessive. And while it is often said that valuation is a poor timing mechanism, it is also often a mistake to ignore evidence of excess. The S&P 500® index currently sits at record highs based on its price-to-earnings (P/E) and price-to-sales ratios. And although the trend is up, the index sits at the highest level relative to its 200-day moving average in over 15 years. On Friday it closed at a technically oversold level. Margin debt is at a record. Certain measures of sentiment are also elevated. Perhaps the starkest example of speculative excess is Bitcoin, which has more than doubled in price in just three weeks.
The forward price to earnings ratio of the S&P 500 for calendar 2021 is currently 23X, based on the expectation that earnings will grow by roughly 22 percent this year. Not until 2022, based on expected earnings growth, does the P/E ratio decline to a more reasonable 20X. Even that level is at the high end of historical experience but can at least be justified on the basis of expectations that the Fed will still be holding the overnight rate at effectively zero and fiscal policy will be doing its part. Both of those conditions appear reasonable, based on what we know today, but current valuations also suggest that stock prices may already reflect a good deal of those expectations.
The Bull Market Likely Hasn't Run its Course, But Stocks May Be Due for a 'Healthy Correction'
None of this is to suggest that the current bull market has run its course. But it does make it more likely, and indeed more welcome for the longer-term investor, that stocks are due for a pull back, or what is often termed a 'healthy correction.' It is difficult to know what might be the catalyst for such a pullback.
But one thing to watch is the yield on the ten-year Treasury note. It has been said many times that part of the attraction of stocks is that, with bond yields so low there is no alternative. And low bond yields elevate the price investors are willing to pay for the future earnings stream of equities. However, last week the yield on the ten-year note surged higher by 21 basis points, rising above 1.00 percent for the first time since March and ending the week at 1.12 percent. How much further this move will run remains to be seen, but at some point, investors will take note, and equities might suddenly look very expensive.
Important Disclosures:
Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
Definitions of individual and sector indices mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor.
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.
Past performance is not a guarantee of future results.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
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Ameriprise Financial Inc. published this content on 12 January 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 12 January 2021 14:59:08 UTC
