Broker Check

Weekly Market Update March 15, 2024

March 18, 2024

Fed Funds 5.25% - 5.5%, US Ten Year 4.31%, Oil $81.11

Major equity indices ended the week where they began, as the inflation numbers were not good. The February Consumer Price Index, both core and overall, came in above estimates at .4% higher month over month. The Producer Price Index, or PPI, was .6% higher month over month, as both food, energy AND goods inflation came in higher than expected. PPI is a good indicator of “pipeline” inflation, what to expect later in the year. The consequences are fewer interest rate reductions this year, only three instead of the six expected at the end of 2023, and a diminishing chance of a lower rate coming out of the June Fed meeting. As for the economy, February consumer sales were lower, and January’s figure revised downward. Credit card debt is at record highs as consumers deal with stubbornly higher prices.

Given the huge run-up in stocks since the October 31 low and with interest rate reductions further into the future, are stocks overvalued? Consider price-to-earnings ratios. Over the 40 years from 1981 to 2022 the average price-earnings ratio of the Standard & Poor’s 500 has been 21.92.* Using the $270 consensus earnings estimate for 2024 for the S&P 500, the target for the index is 5,918, 15.7% above the current 5,117, or 23% for the entire year, not including dividends. How likely are two such back-to-back years? More likely than one might think. For three consecutive years from 2019 through 2021 the total return of the index averaged 26.2% annually.

There is the well-publicized problem of a bifurcated market, where a handful of giant stocks are carrying the index while most other stocks move sideways. The chart on the left shows the market-weighted index significantly outperforming the equal-weighted index over the past 14 months, 32% higher compared to 12%. But as the chart on the right reveals, over 15 years the equal-weighted index has done better in most years than the market-weighted. Chances are it will revert to that.

The lesson here is straightforward. While racking up huge gains in the Amazons, Microsofts, Nvidias et al is gratifying, when these positions get very large consider selling part the holding and realizing gains. We often reduce a position when it represents 10% or more of a portfolio. Redeploy the sale proceeds into stocks that have not risen as much, which will increase the portfolio’s diversification. In effect, you will be playing with the “house’s money,” or the market’s money. As the saying goes, no one ever went broke taking a profit.


Wishing You an Outstanding Week,

*The average price-to-earnings ratio for the S&P 500 was 13.34 between 1900 and 1980. The much higher ratio now is a result of the huge bull market in bonds that followed the end of the sharp interest rate increases of the early eighties that Paul Volcker put in place to combat the hyper-inflation of the sixties and seventies.