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Why the Market Remains a Value at All-Time Highs

December 12, 2019

As tracked by the S&P 500 Index, the US stock market has gained 26% in price and 28.5% in total return for the year to date.

Those are remarkable numbers.

But to put it into perspective, if you include the full fourth quarter of 2018 to date, the price gain is only 8.5% and the return is 11.1%, which is a lot more calming than the year-to-date numbers might imply.

Another calming data point is that US stock funds saw an outflow of $60 billion during the third quarter of this year, as many investors saw reason to pull back on stock allocations.

This means that more institutional money is in-line with the buoyancy of the current market and that there is indeed value to be bought.

This also shows up in a measure of investor confidence in the stock market as well as an ancillary outlook for the economy behind the market.

State Street (STT), the huge passive and active fund company, conducts its Investor Confidence Index—a sentiment index that is really more of an inverse indicator.

Investor Confidence Index (White) & S&P 500 Index (Gold)—Source: State Street & Bloomberg Finance, L.P.

You can see in the graph plotting the Investor Confidence Index against the S&P 500 Index that, from the fourth quarter of 2016 to date, confidence was pretty steady at first, even as 2017 saw a good run-up in the S&P 500.

The stock market then had trouble in the fourth quarter of 2018 as there was a peak in confidence. But since the S&P 500 Index bottomed, confidence has remained at low to subdued levels.

This points to a less frothy stock market and one that is not fueled by the old “irrational exuberance.”

Sales, Earnings & Dividends

Then we come to the rationality of buying stocks. Stocks are bought under the belief that the underlying assets are undervalued and expected to rise. And that revenues and profits should also be on the rise.

This is what went wrong in the fourth quarter of last year, as expectations for revenues and earnings went into the tank only to be swiftly reversed starting on the day before Christmas. But now we have the third-quarter reports for the S&P 500 Index members filed along with the expectations for the current and following quarters.


S&P 500 Index Members Average Sales & Earnings and Compiled Expectations—Source: Bloomberg Finance, L.P.

You can see in the graph that while the average sales and earnings gains slowed into 2019, they are projected to rebound for the fourth quarter and into 2020.

As the current numbers for the third quarter are in, it’s interesting to see that expectations are coming up, providing a value proposition for the 505 stocks inside the S&P 500 Index, even if individual investors aren’t cued into the underlying numbers.

For the current quarter, overall sales are set to gain 5.7% on average, while earnings may well remain largely flat. But when you look deeper into the sector members, there is better news.

For instance, US-centric utilities are projected to report sales gains in excess of 7.5% and earnings gains of nearly 16%.

Real Estate Investment Trusts (REITs) are expected to gain over 3.1% in sales, with earnings gaining in excess of the average for the S&P 500. This is one of the reasons I remain enthused for both of these segments.

And for income investors like us, utilities offer a current yield of 3.15% on average, while REITs offer a current yield of 3.87% on average. Both are much higher than the 1.85% average yield of the S&P.

Underlying Value

Then we come to the underlying net assets of the companies inside the S&P 500.

Book value per share continues show a strong, consistent advance in the underlying average for the members in the index.

S&P 500 Index Average Book Value Per Share—Source: Bloomberg Finance, L.P.

Book value per share for the S&P 500 members has been climbing by 16.4% over the past three years.

That’s supporting higher stock prices along with the resulting increase in sales and earnings over the same time period. Again, this supports a stock market that is less frothy and has greater value.

With a price-to-book value of 3.33 times and a price-to-sales value of 2.14 times, both valuation measures are well below levels seen in late 2017 and in 2018.

In other words, there is still plenty of value left in the stock market for those who know where to look.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life