Since then, the Dow Jones Industrial Average (INDEXDJX:.DJI) and the S&P 500 Index (INDEXSP:.INX) are down about 3 percent (as of yesterday morning), even after hitting record highs in early August.
At the time, I warned that for most of 2013, investors had been in a buying mood as Federal Reserve Chairman Ben Bernanke consistently reaffirmed easy-money policies. But as I cautioned, those policies — official interest rates near zero and trillions of dollars in bond buying — can’t go on forever.
Based on recent developments, I have become convinced that early August marked the top of the equity markets for 2013 — the S&P 500 at 1,710.
That’s because P/E multiple expansion, not earnings growth, has fueled the rally in U.S. equities. (That term refers to a situation in which the price-to-earnings, or P/E, ratio rises because investors are increasingly willing to pay more for a dollar of earnings.) In fact, Scott Minerd of Guggenheim Partners reports that while the S&P 500 has increased by more than 34 percent since the beginning of 2011, only 6 percent of that return has come from earnings growth, and the rest from multiple expansion.
Recall that there are only three elements of investment return: P/E multiple change (expansion or contraction), earnings growth and dividend yield, with P/E multiple change being the most volatile and unpredictable factor.
|A rally in stocks driven by multiple expansion, not earnings growth, is likely unsustainable and a market decline seems inevitable.|
More alarming is the fact that corporate earnings growth has slowed (instead of accelerated) during that same period, registering the slowest earnings growth in non-recession years since 1998. Without renewed earnings growth, a rally in stocks driven by multiple expansion is likely unsustainable and a market decline seems inevitable.
It’s also interesting to note that this expansion in P/E multiples over the past 2 1/2 years has occurred despite these factors: Questions about the sustainability of growth in China, mounting evidence suggesting that further quantitative easing may be ineffective, a growing lack of confidence in our leaders in Washington D.C., and disappointing revenue and profits in the second quarter.
That means the S&P 500, despite its recent decline, still stands within 4 percentage points of an all-time high because investors have discounted all of this bad news and looked toward the future with optimism.
But I see evidence that this upward trend in the stock market will come to an end.
Below are four reasons why I believe the U.S. stock market has peaked for the year.
1. The selection of a new Federal Reserve chairman is a bigger deal than is expected. Whether the ultimate choice is Larry Summers, Donald Kohn, Janet Yellen or perhaps even Tim Geithner, the selection process is going to be bumpy. And a market that is being held together by an easy-money policy can’t take a lot of uncertainty.(...)Click here to continue reading the original ETFDailyNews.com article: Dow Jones Industrial Average: 4 Reasons Why The Upward Trend Is OverYou are viewing an abbreviated republication of ETF Daily News content. You can find full ETF Daily News articles on (www.etfdailynews.com)
- Dow Jones Industrial Average and S&P 500: Weakness Remains The Trend
- 5 Reasons The Dow Jones Industrial Average’s New Highs Are “Bull-o-ney”
- Dow Jones Industrial Average: Ready For Liquidation?
- Dow Jones Industrial Average and S&P 500 Hit A Wall; What To Do Now
- Dow Jones Industrial Average: Why The Easy-Money Markets Will Soon End
Nasdaq quotes delayed at least 15 minutes, all others at least 20 minutes.
Markets are closed on certain holidays. Stock Market Holiday List
By accessing this page, you agree to the following
Press Release Service provided by PRConnect.
Stock quotes supplied by Six Financial
Postage Rates Bots go here