It comes as no surprise that stocks are struggling to break through technical barriers at Dow 13,000, Nasdaq 3,000, and S&P 500 1370. I continue to believe that it will require greater market breadth and trading volume to achieve a major breakout. Even though Fed Chairman Bernanke on Wednesday threw a wet blanket on the bullish flame by playing down economic recovery while giving no hints about further quantitative easing in his semiannual testimony to Congress, the market still wouldn't sell off much. Apparently, his cautious words can't override his stimulative actions.
Among the 10 U.S. sector iShares, Technology (IYW), Financials (IYF), and Consumer Services (IYC) have been the leaders this week. No surprise about IYW given that high-flying Apple Inc. (AAPL) makes up 18% of the ETF. As it turns out, IYW and IYF are also the top ranked sector ETFs in this week's Sabrient rankings.
It's a nice change of pace to not see European sovereign debt as the top headline lately. Although avoiding a Greece debt default is still not a certainty (or even a high probability), there are definite signs of stability in the eurozone—at least for the moment. Bond rates in Italy and Spain are below "critical" levels.
Still, austerity requirements from its rescuers have plunged Greece into a deep recession. The Greek economy contracted by 7% during 4Q2011 and unemployment is about 20% (46% among the younger workers). And there is a lot of doubt throughout the international community that Greece has the will to pull it off in the face of violent anti-austerity protests. Spreads on Greek 5-year Credit Default Swaps have risen such that the market has essentially priced in a Greek default. The market would next watch for a possible contagion spreading to Italy, Spain, Portugal and Ireland. Furthermore, S&P cut its outlook on the European Financial Stability Facility (EFSF) to negative. Nothing is coming easy in solving this crisis.
But here in the U.S., near-term signs continue to brighten. Despite the steep rise in the major averages, valuations are still reasonable on a historic basis. The forward (i.e., using next year's consensus earnings estimates) price-to-earnings ratio (P/E) for the S&P 500 is about 13x. This contrast favorably with the historic average of 15x over the past 10 years.
Of course, the forward P/E comes with uncertainty. If we instead look at the trailing 12-month (TTM) P/E, the S&P 500 is closer to 14x. For comparison, when the S&P 500 was at this same price level last May, its valuation was closer to 16x, and in summer 2008, its valuation was more like 17x. So, current S&P 500 valuation is reasonable, and even more so given that other liquid investment alternatives like bonds have been rendered relatively unattractive, courtesy of the Fed's low-interest rate, weak-dollar (a.k.a., "stimulative") policy.
However, Jonathan Golub, chief U.S. equity strategist for UBS, has recently stated that without the incredible earnings contribution from Apple, U.S. corporate earnings average growth is only about 2%, which isn't quite so encouraging. Indeed, Wall Street analysts on balance have been cutting back on their earnings estimates.
Since the turn of the century, the S&P 500 has gone up a little and down a lot, and today it is essentially right back where it started, leading many observers to say that you can't buy-and-hold stocks anymore. Instead, they say you must trade the "trading range"—and current valuations are closer to the high end than the low end. There is some validity to that argument if you only trade the indexes, but that doesn't mean you can't own the very best stocks for the long haul.
Certainly, Apple (AAPL) is one for the ages. The stock is up 34% this year (through Wednesday) and 4,500% over the past 10 years. It is now valued at over half a trillion dollars, making it by far the largest market cap company in the world—leaving Exxon Mobil (XOM) in the dust. But even after such a huge rise, it is still trading only around 11x forward earnings, which is quite reasonable for such a fast-growing juggernaut. Much of its recent strength has been in anticipation of next week's expected unveiling of the new iPad 3, which rumor has it may be offered in three versions: Wi-Fi, 3G, and the long-awaited 4G. Ay, caramba!
Other stocks have stood out, as well.