Friends
It seems like, after some careful consideration, market participants have decided that the Fed decision not to taper just might have been based on a somewhat less than favorable view of the domestic economic and political condition. Remember, on Wednesday traders partied like it was 1999. Not so much the last two days. It didn’t help that both Warren Buffett and Carl Icahn indicated on television that stocks weren’t that cheap anymore. We’ve talked about valuation forever in both our daily updates and our quarterly reports. When the S&P 500 is trading at 12 or 13 times earnings, as was the case back in 2009, 2010 and 2011, stocks are cheap on a historical basis. When you get to 16 or 17 times earnings as we stand today, the simple fact is, stocks aren’t as cheap anymore. Traditionally, valuation is not considered stretched until we get closer to 20 times earnings (remember the S&P got to 35 times earnings in 1999 and early 2000). Of course, if we can get earnings growing at a little faster pace, then valuation can remain un-stretched and stocks can continue to rise. Also, remember that interest rates are figured into stock valuation. If rates remain low, valuations tend to rise.
As for today, the Dow Jones Industrial Average was down 185 points to close at 15,451. The S&P 500 was down 12 points to finish the day at 1709. Gold was down $41 to trade at $1327 per ounce, while oil was down $1.01 to trade at $104.85 per barrel WTI. For now, at least, the bulls held onto S&P 1700 for the week.
What a week this was. Traders came into the week expecting the Fed to begin the tapering process, but were taken by surprise when Dr. Bernanke and the gang passed on doing anything new right now. Then on Thursday and Friday we heard from various Fed members with various points of view, and it seems traders became more and more confused. When confused, traders tend to sell and ask questions later. Let’s see what kind of mood market participants are in on Monday morning. Next week should be interesting too.
Have a great weekend everyone. Stay dry.
