On 10/29/2021 I wrote The Weekly Update titled “Inflation: A Look Back Could Help as We Look Forward” (Read it Here)
In that update I detailed that money supply causes inflation and made the case that at that time it was far from “transitory” as our Federal Reserve Chairman, Jerome Powell, referred to it.
Since January of 2023 the market valuations of Corporate America have rebounded quite strongly. Most of this bounce up has been based on speculation that the Federal Reserve is close to being done with the interest rate increases in their effort to squelch inflation.
When writing this month’s update of The Seven Signs of a Changing Economy™, I noticed the St. Louis Federal Reserve report that measures the reduction in money supply is down a mere 5% from the peak.
This would suggest the Fed may not be just a few 1/4% interest rate increases away from “stepping back” to see where the economic prices fall. Instead, it would be realistic to consider the Fed may have as many as four more 1/4% interest rate increases.
If this becomes reality, the market valuations have gotten ahead of Fair Market Value. The full-year 2023 earnings per share for Corporate America, as measured by the S&P 500, have seen the consensus of economists to reduce to around $220 per share.
Per J.P. Morgan Guide to the Markets dated 12/31/2022, the average Price to Earnings (P/E Ratio, a measure of risk) has been 19 times when short-term interest rates are now at the current 5% level.
Let’s do the arithmetic: $220 x 19 suggests an S&P 500 Fair Market Value (FMV) of 4,180. Today (2/15/2023) we trade at 4,147. So, just about FMV, unless earnings continue to drop, or fear levels increase. That 19x average could drop to say 17x. Both combined could suggest there is 15% downside below. Upside? Unknown!
Strategy? We will continue to carefully, thoughtfully, and intentionally reallocate the cash raised as our shock absorber early last year. If the markets continue to slowly increase without a serious (15%+) “back and fill”, great, we have a portion invested.
Up, down, or sideways we will be making several entry points in the well thought out opportunities that will be our seeds planted for each of your bigger financial futures, i.e., Five Year Money (Read it Here)
I’m interested in your thoughts, comments, and observations. Feel welcome to call, email or stop by the office and say Hi.
James O. Lunney, CFP®
CERTIFIED FINANCIAL PLANNER™ Professional
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.