Is the Stock Market Done or Just Taking a Pause?
May 16, 2019
The recent selloff in the S&P 500 Index shouldn’t come as a complete surprise, as any bull market never simply continues higher in a straight upward line. In fact, the big run up since December 24 of last year has concerned me even before the events of the past couple of weeks.
But that’s exactly why owning a solid selection of top-quality income and growth names is the ideal strategy to get you through good times…and bad.
The US economy is still doing well. No one is expecting declines in consumer confidence or major business investment. The same is the case for the bond market, with low inflation and eager demand for credit investing.
And while the U.S.-China trade war is grabbing headlines, so too are positive developments involving the trade of automobiles with Europe and Japan.
There is also the argument that the stock market is a better value right now than it was last year. One of the primary metrics of value used by investors is the price-to-earnings (PE) ratio of the S&P 500 Index.
It’s down from the peak last year by a good margin.
Price-to-Earnings Ratio for S&P 500 Index—Source: Bloomberg Finance, L.P.
There is still ample room for improvement before we get back to the perilous highs.
This also extends to a better measure of value for the market, which is the price-to-sales (PS) ratio. This measures the price of the index against the average sales of the underlying companies.
This is important, as it takes out some of the near-term accounting that is used to manage earnings.
The PS ratio for the S&P is up from the December lows, but it’s still below last year’s peaks.
Price-to-Sales Ratio for S&P 500 Index—Source: Bloomberg Finance, L.P.
Then there are the intrinsic underlying values of the companies in the index. This can be valued by looking at the price-to-book (PB) ratio, which measures the price of the stocks against the average book value of company assets.
Price-to-Book Value of the S&P 500 Index—Source: Bloomberg Finance, L.P.
The PB ratio is lower than the peaks of last year, but it’s a bit higher than the PE and PS ratios.
Yet, the underlying book of assets for the companies in the S&P has been very much on the way up. For over the past three years, the weighted average book value of the companies in the Index has climbed by 13.40%.
This means that companies continue to build more value in their businesses and their assets, which should support higher stock prices over time.
The key thing to remember is that the S&P 500 is broad and diverse. While overall revenue and earnings growth is muted so far this earnings season, some industries are faring better than others.
Consumer goods—both staples and discretionary—are reporting significantly higher revenue and earnings gains. The same goes for healthcare and real estate investment trusts (REITs).
This is why I continue to tell you to focus your attention on specific sectors and the leading companies in those sectors.
Comparison of Sectors
Bloomberg REIT, S&P Utilities, Information Technology, Healthcare, Alerian MLP Indexes—Source: Bloomberg Finance, L.P.
The REIT sector is one of my favorites, as their underlying improving values in their properties support higher and rising dividends.
I continue to like utilities as well, which provide access to steady profits from regulated markets with growth from their unregulated ones, all adding to higher dividend income.
And tech companies continue to provide efficiencies for their investors with recurring revenues. The easy way into this sector is through the Vanguard Information Technology ETF (VGT).
I’m also bullish on the US energy sector, as an increase in energy infrastructure is allowing more oil and gas to flow for domestic use and export. One of the best ways into the pipeline sector is with the Goldman Sachs MLP Income Opportunities Fund (GMZ).
Lastly, US healthcare is a megatrend. And the easy way to get into this market is by owning the Vanguard Health Care ETF (VHT).
Bottom line: There are plenty of income- and growth-focused companies and sectors that should deliver in the coming quarters, regardless of the headlines, you just have to know where to find them.
And if you need help finding them, I have an even more safe investment opportunities for growth and income in my Profitable Investing advisory.