The FOMC has continued to be very accommodative to U.S. Equity investors in its attempts to spur economic activity. Coupled with slow but steady economic growth and a good jobs report, investors are as fearless as ever. This has been evidenced by rising prices into historically high valuations while the VIX (fear index) once again plummeting to low levels.
While the risk of an economic recession appears unlikely in the short-term and the break-out to new highs is technically strong, I continue to maintain a significant amount of cash. As a long-term value investor, high valuations continue to leave me in the rare situation of having difficulty finding new value buys. This won’t change until valuations come back to earnings or earnings start to accelerate.
The S&P 500 P/E sits near 25 (average 16) using standard accounting principles with forward earnings above 19. This puts current P/E valuations in the top tenth percentile on an historical basis. The P/E ratios of “safe” dividend stocks are even higher. Utilities are valued at over 30 times earnings and the S&P Consumer Staples Index over 35. This may be acceptable if revenues were accelerating but we have yet to surpass the Q4 2013 earnings high of 105.96 per share. Additionally corporate debt has grown by 56% over the last five years led by Technology Companies at 187% and Health Care at 175%.
The revered Jeffrey Gundlach, who runs the $100 billion DoubleLine fund candidly pointed out the following:
“The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.”
If there is another short-term correction such as there was in the beginning of the year that could be another great buying opportunity. Until then I continue to exercise patience as I have in similar markets in the past. It’s not exciting, but it is profitable long-term.