The S&P 500 Index has been up and down over the last few weeks, eliminating gains made earlier this year. After a dip in late January and early February, the S&P was pulled higher through the second and third quarter by mostly tech stocks.
Note, the NASDAQ took off after the correction earlier this year and the S&P 500 followed suit. However, the New York Stock Exchange Composite Index spent most of the year hovering around flat. The Q2/Q3 rally was largely due to some of the largest companies posting solid returns (i.e. Amazon, Apple, Microsoft). Remember, the top 10 contributors to the S&P 500’s return through Q3 accounted for 54% of the return. The NYSE Composite Index is a great barometer for the overall health of the market. Unlike the S&P 500 Index, it does not include the large NASDAQ listed tech companies.
The NYSE Composite is comprised of approximately 2,000 U.S. listed companies, including small, mid, large-cap, and ADRs.
A few stats on the S&P 500:
About 300 stocks have a negative return for the year
200 are down 10% or more
100 are down 20% or more
It is safe to say the majority of stocks are nearing a bear market. Markets have been fragile since October for two reasons: the Fed’s desire to continue to raise rates, and weaker forecasts.
The S&P 500 has trailing 12-month P/E of 21.3. If corporate fundamentals return to average then that could trigger a return to average P/E’s.
Long-term average P/E 15.8
Current P/E 21.3
Loss on reversion to mean -26%
If stocks slip into a bear market, the 2008 P/E was 10.9. That’s a loss of 49% from here.
At WBI, we believe there is never a good time to lose half your capital. We use cash as a risk mitigation tool to protect and preserve capital in times of market stress. While we are hopeful Santa will deliver a year-end rally, we think investors need to be cautious of the Grinch stealing Christmas.
Important Information
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Source: Bloomberg as of 12/7/2018
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