The cruise ship left New York heading for Bermuda. A terrible storm has blown up. The seasick passengers are in their staterooms vomiting. "Is there anything that can be done to get out of these waves," they ask? "Nothing," says the captain. "We just have to drive through until we get to the other side."
And so with US stocks this year. The S&P 500 peaked with a gain of 9% YTD on April 29th, plunged 12% through August 5th, rallied back to breakeven on the year, slumped again through October 3rd down 11.3% and is now down 2.46% on the year. The quarter that just ended was the worst since Q4 2008 - the last great financial crisis. Markets are three times more volatile compared to the first half of the year, though half as volatile as the September 2008-March 2009 timeframe. The issue weighing on US stocks is the uncertainty of macro events in Europe. On a valuation basis:
- S&P 500 earnings will set a new record this quarter
- The trailing P/E ratio on the S&P 500 is now 12.4, a favorable ratio seen previously only a few times in the last 50 years
- Treasury bond yields are at the lowest levels since the 1950's
Add that all together and we conclude that stocks are at the cheapest valuations in 50 years. We thought US stocks would close out 2011 with a gain of at least 8%. On a valuation basis stocks should be 15-25% higher. However, investors don't care until the situation in Greece is resolved, and that won't be until the New Year at the earliest.
So rather than obsess about the waves rolling the ship, we need to ensure that our "passengers" stay focused on the final destination. Of course we can deliver a 50 page financial plan, but sometime a simple picture is worth a 1000 words.