Is it the Time to Sell Your Stocks? Here’s Sharek’s Take on the Stock Market

Index (Symbol)

S&P 500 (.SPX)



Data is as of
August 5, 2019
Sharek’s Take
David SharekThe Dow dropped 767 points on Monday, while the NASDAQ declined for the 6th straight day. So I felt this was a perfect time to charts and tables on the market. Although the Dow (Dow Jones Industrial Average, or DJIA) gets the headlines — especially overseas — its really the S&P 500 (.SPX) that is the true barameter for U.S. stocks. Investors commonly refer to the S&P 500 as “the S&P” or “the market”. With the stock market now in a correction, here’s my take on whether it’s time to buy, sell or hold.
One Year Chart
Here’s a one-year chart of the S&P 500. The market peaked at 3025, which was a P/E of 18. Here you can see the 6 day drop cleanly (last week and Monday August 5). Note that you could put a ruler up against these three bottoms, and they all fall into a line. That’s a good thing.

Along the bottom is the market’s qtrly year-over-year profit growth for the last 4 qtrs, and Estimates for the next 2 qtrs. Trump’s corporate tax cuts really helped profits last year. Now the year-over-year comparisons will be tougher.

The stock market has a P/E of 17. That’s reasonable. More on this below.

In the Annual Profits column, note profits have been up every year since 2011. That’s very good.

Earnings Table
Corporate tax cuts played a big part in the S&P growing profits 23% in 2018. LastQtr was the first qtr of 2019, and profit growth was 3%. I think the market should grow 6%, so this qtr was less than I would like but the S&P 500 doesn’t give consistent qtrly growth, as the price of oil fluctuates, as do profits for Energy companies.

Annual Profit Estimates increased a bit. 2019 estimates rose from $167 to $167.91 and 2020’s went from $176 to $179.43.

Qtrly profit Estimates for the next 3 qtrs are 0%, 0% and 2%. I don’t have a 4QtrsOut estimate. Profit growth is expected 0% to 2% for the next 3 qtrs, but as you can see from the last few qtrs the end result is often different than expectations (beat and missed).

Fair Value
The S&P usually has a P/E between 15 and 20, so this 17 P/E is in the middle.

What is the S&P 500 worth? Since interest rates are low, there’s not much competition for your money from bank CDs (or bonds in general). Stocks are more attractive than bonds right now, and the market deserves a higher P/E than normal. This thesis is from Jeremy Siegel, Professor of Finance at the Wharton School and Author of Stocks for the Long Run.

My Fair Value for the S&P is a P/E of 18. Which we were at last month. That’s 7% higher than yesterday’s close. I think the market is now undervalued. Upside when we look to the end of 2020 is a robust 14%.

Notice in this table that 2018’s P/E was only 16. 2018 was a good year from Jan through September. That year, my Growth Stock Portfolio had made investors 22% year-to-date through September. On October 5, 2018 Vice President Mike Pence gave a speech on China relations, and the stock market proceeded to drop during the 4th qtr on expectations of a China/U.S. trade war. So investors have known Trump would play hardball with China for 10 months! This is old news! It’s been known, and we’ve taken our lumps during the 2018 Q4 Bear Market. My Growth Portfolio finished with a -4% return in 2018. I think Trump doesn’t want to make a deal. He wants to keep America #1. Watch the video.

A recession would most likely bring these earnings estimates lower. But even if that were to happen, I don’t believe the S&P’s P/E would go below 16. Interest rates are low — and that’s a given — which means the P/E should be higher than normal. 2% CD rates aren’t gonna get people to sell stocks, when you can own stocks that have dividend yields of 2%.

When the market’s P/E was 13-14 during 2010 – 2012 that was perhaps a once-in-decade buying opportunity for stocks. Investors were scared of stocks as we just had two crashes (2000 and 2008) within a decade. It may be a while before we see stocks that cheap again. Crashes are usually 20 to 25 years apart, as it takes a new generation to trust stocks with reckless abandon. 

Bottom Line
When we see a ten-year chart of the S&P 500, both profits and the index have grown 11% a year during the past decade. Stock growth often reflects profit growth.

Keep in mind the market was low in 2009, at the beginning of this chart. The S&P was around 1500 in 2007, and this chart starts at around 1000. Profits were also well off the high of $87.72 set in 2006. I expect the S&P to grow 6% long-term. Companies might grow profits 5% a year naturally (new inventions, better efficiencies) and inflation of 1% gets me to 6%. If inflation were a normal 3% then I think the S&P might grow 8% a year. Note: this is an average. The stock market doesn’t deliver consistent returns.

According to my analysis, the market (measured by the S&P 500) is currently undervalued. Further short-term declines would only increase the market’s short-term upside. But with 4% profit growth expected for 2019, I feel investors would be better off investing in individual stocks with faster profit growth.

Conservative investors can fine a plethora of stocks growing profits 10% or greater, and growth investors should focus on companies growing profits 20% or more. Over the long-term, stock growth often reflects profit growth. So own stocks with rapid profit growth.