Peek of the Week
August 16, 2016
Leif Hagen and Donna Roberts
The
Markets
How do you measure stock market
valuation?
If
you look at conventional measures – like price-to-earnings (P/E) ratios – then
U.S. stock markets appear to be pricey. The
Wall Street Journal reported trailing 12-month P/E ratios are high when
compared to 10-year averages.
High
P/E ratios haven’t dampened investors’ interest in U.S. stocks, and share
prices have been moving higher. The Dow Jones Industrial Average (Dow),
Standard & Poor’s 500 Index, and NASDAQ all reached new highs last Thursday
– the first time that has happened since 1999.
Barron’s suggested investors’ enthusiasm
for stocks is rooted in the search for yield. “With the Treasury’s 10-year note
yielding 1.5 percent – near lows not seen before in modern history – there’s no
alternative to stocks for investors who want returns.”
The relationship
between stock yields and bond yields may have some investors measuring market
valuations in different ways. Investopedia
reported, during the late 1990s, Wall Street professionals came up with a new
method for gauging stock market valuation. It was called The Fed Model and it
determined full valuation by comparing stock yields to bond yields. (Please note:
‘The Fed Model’ wasn’t created by the Federal Reserve System, and the Federal
Reserve System does not endorse it.)
The
Wall Street Journal
offered this analysis:
“…the so-called Fed model, which says that stocks’ earnings
yields – that is, expected annual earnings divided by the share price – should
equal the yield on the 10-year Treasury note. With the 10-year now yielding
1.52 percent, the Dow would be fairly valued at 66 times earnings rather than
the current, measly 18. Dow 68,000 anyone?”
It’s
an enthusiastic estimate. While some analysts are speculating the Dow could
surpass 20,000 during the next 12 months, according to CNBC, others are suggesting investors proceed with caution.
Data as of 8/12/16
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard &
Poor's 500 (Domestic Stocks)
|
0.1%
|
6.9%
|
4.7%
|
8.9%
|
13.1%
|
5.6%
|
|
Dow Jones
Global ex-U.S.
|
2.7
|
4.3
|
-2.6
|
-0.3
|
2.0
|
0.2
|
|
10-year
Treasury Note (Yield Only)
|
1.5
|
NA
|
2.1
|
2.6
|
2.2
|
5.0
|
|
Gold (per
ounce)
|
0.9
|
27.3
|
20.8
|
0.3
|
-4.9
|
8.0
|
|
Bloomberg Commodity Index
|
0.3
|
7.0
|
-7.5
|
-12.9
|
-11.8
|
-6.9
|
|
DJ Equity All REIT Total Return Index
|
-0.2
|
15.8
|
19.2
|
14.3
|
15.1
|
7.3
|
S&P 500, Dow
Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested
dividends (gold does not pay a dividend) and the three-, five-, and 10-year
returns are annualized; the DJ Equity All REIT Total Return Index does include
reinvested dividends and the three-, five-, and 10-year returns are annualized;
and the 10-year Treasury Note is simply the yield at the close of the day on
each of the historical time periods.
Sources: Yahoo!
Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance
is no guarantee of future results. Indices are unmanaged and cannot be invested
into directly. N/A means not applicable.
An
olympic medal in any other shape still represents a great feat. In 1900, the Olympic games were
part of the World’s Fair in Paris. Champions received square medals! Olympics.org reported:
“The
1900 Olympic Games are perhaps the most unusual Olympics in modern history.
They have been termed, with the 1904 Olympics, ‘The Farcical Games.’ The 1900
Olympics were poorly organized, almost chaotic. Years later many of the
competitors had no idea that they had actually competed in the Olympics, but
only that they had competed in an international sporting event in Paris in
1900.”
During the Paris Olympics,
champions did not receive gold medals; they were given silver medals. The first
time gold medals were awarded was at the 1904 Olympics in St. Louis, Missouri.
While gold medals have become the standard, they haven’t been made of solid
gold since 1912. Instead, winners’ medals have been made of a combination of
gold and silver.
CNN reported gold medals in Brazil are
comprised of “494 grams of silver and 6 grams of gold…a gold medal is worth
about $587 in current market prices.” The silver medal is worth about $305, and
the bronze medal has negligible monetary value, according to CNNMoney. Of course, once a medal has
been awarded, its value may increase significantly.
U.S. Olympians receive cash
rewards, in addition to medals. CNNMoney reported,
“The U.S. Olympic Committee awards $25,000 for gold medals, $15,000 for silver,
and $10,000 for bronze.” Olympians owe state and federal taxes on their prize
money, as well as the value of their medals.
Weekly Focus – Think
About It
“…most people listen with the intent to reply, not to
understand. You listen to yourself as you prepare in your mind what you are
going to say, the questions you are going to ask, etc. You filter everything
you hear through your life experiences, your frame of reference. You check what
you hear against your autobiography and see how it measures up. And
consequently, you decide prematurely what the other person means before he/she
finishes communicating.”
--Stephen
Covey, American author
Olympic regards from Eagan,
Leif M. Hagen
Leif M. Hagen, CLU, ChFC
LP Financial Advisor
Securities offered through LPL Financial Inc., Member FINRA/SIPC.
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* This newsletter was prepared
by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the
named broker/dealer.
* The Standard & Poor's
500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock
market in general. You cannot invest directly in this index.
* The Standard & Poor’s
500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect
fees,
expenses, or sales charges.
Index performance is not indicative of the performance of any investment.
* The 10-year Treasury Note
represents debt owed by the United States Treasury to the public. Since the
U.S.
Government is seen as a
risk-free borrower, investors use the 10-year Treasury Note as a benchmark for
the long-term bond market.
* Gold represents the
afternoon gold price as reported by the London Bullion Market Association.
The gold price is set twice
daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in
U.S. dollars per fine troy ounce.
* The Bloomberg Commodity
Index is designed to be a highly liquid and diversified benchmark for the
commodity futures market. The Index is composed of futures contracts on 19
physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT
Total Return Index measures the total return performance of the equity
subcategory of the Real Estate Investment Trust (REIT) industry as calculated
by Dow Jones.
* Yahoo! Finance is the
source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are
subject to change without notice and are not intended as investment advice or
to predict future performance.
* Economic forecasts set
forth may not develop as predicted and there can be no guarantee that
strategies promoted will be successful.
* Past performance does not
guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly
in an index.
* Consult your financial
professional before making any investment decision.
* Stock investing involves
risk including loss of principal.
* To unsubscribe from the
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Sources:
http://www.wsj.com/articles/stocks-hit-new-highs-and-that-could-be-just-the-start-1470954978 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/08-15-16_WSJ-Stocks_Hit_New_Highs_and_that_Could_be_Just_the_Start-Footnote_1.pdf)
http://www.barrons.com/articles/stocks-hit-record-highs-but-end-little-changed-1471060856?mod=BOL_hp_we_columns (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/08-15-16_Barrons-Stocks_Hit_Record_Highs_but_End_Little_Changed-Footnote_2.pdf)
http://blogs.wsj.com/moneybeat/2016/08/10/dow-68000-here-we-come/ (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/08-15-16_WSJ-Dow_68000_Here_We_Come-Footnote_4.pdf)
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