Monday, 7 October 2013

An Expensive US Stock Market Facing Bank Credit- and Money Supply Growth Headwinds: 10-year Average Earnings- and Dividend Yields, S&P 500 (as of 4 Oct-13)


Earnings - and dividend yields as of 4 October 2013
Based on the closing price of the S&P 500 index of 1,690.50 on 4 October 2013 and data from Professor Robert Shiller's home page, the current 10-year average real earnings- and dividend yields for the S&P 500 index are as follows (please refer to the June 2012 analysis for background information):


Earnings- and Dividend yields as of 4 October 2013
The 10-year average real earnings yield increased to 4.25% from 4.22% last month as Q2 earnings are now included. Earnings per share (4 quarter rolling total) for the index increased from USD 87.70 in Q1 to USD 90.95 in Q2, resulting in a 1.20% increase in 10-year average real earnings. The earnings yield is now 28.43% higher than the average since 1978 and 32.10% higher than the adjusted average (which removes the 1998 to 2000 period when valuations were extremely high) and (except for last month) is the lowest its been since January 2008.


The 10-year average real dividend yield increased marginally from last month. At 1.62%, it is currently 39.04% and 42.03% lower than the average and the adjusted average since 1978 and (except for last month and July) the lowest its been since May 2008.


The Spread as of 4 October 2013
As the earnings yield increased and as the 10-Year Treasury Yield declined 28 basis points since last month's report, the spread (the difference between 10-year average real earnings yield and the 10-Year Treasury Yield) jumped from the 1.29% reported last month to 1.60% to reach the highest spread since July. It however remains among the lowest its been since summer two years ago. The spread continues to be substantially higher than the average since 1978, driven by the very low yield on the 10-year treasury in a historical perspective.




Conclusion
On a month end basis, the S&P 500 index has remained fairly flat during the last three months or so. In fact, since week ending 24 May the index is up only 1.95%. In a historical perspective, the market valuation remains elevated and as I've pointed out before (e.g. see the May report), this is seldom an indicator of future high returns for the index. As market valuations have not changed much during the last few months, my view remains unchanged (see conclusion from two months ago here and last month here).

Though this report is not meant for short-term predictions or as a tool for timing the market, the flat movements in the S&P 500 index in recent months might be a sign of some sort of topping action. I'll take this opportunity again to point out that though the S&P 500 is "only" 8.2% higher than its pre-Lehman high, other major US stock market indices are now more than 40% higher than the corresponding pre-Lehman highs. Most of them have also rallied more than 20% this year, with the Wilshire US Micro-Cap Total Market Index having rocketed 37.3%.


My point here is that this has been a fabulous year for US equities by most standards leaving the overall stock market, including the S&P 500 index, with less up-side potential.

In addition, some key indicators I follow on a regular basis have hit new peaks lately:
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I wrote earlier today in the bi-weekly U.S. Money, Credit & Treasuries Review about the plummeting of bank credit growth which has continued since last month's issue of this report and the slowing down in the growth rate of money supply,
The combination of dismal growth in bank credit, a slowing down in the growth rates of money supply and high US government debt is a potent one that could wreak havoc with many asset classes.
These are challenging times to be an investor and unless money supply and bank credit growth picks up, the landing for investors with long positions in the stock market (and many other asset classes) could be a hard one. This is why my portfolio has been all cash since 23 September this year. And the cash is not in US dollars, but the Norwegian Krone. 

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