The price-to-peak earnings multiple fell to 9.3x on Friday with the market posting its third-straight losing week. Last week saw the release of many quarterly earnings reports and, while there were bright spots in IBM, AAPL, and GOOG, the overall trend seems to reflect that estimates are still too high for many companies. Less than 50% of companies reporting thus far have met their earnings forecasts, which is far below normal conditions. Further dampening the market’s mood is the fact that many companies are declining to offer forward financial guidance, which only exacerbates an already-intense level of uncertainty. While it is understandable for management to be cautious in the face of great economic uncertainty, it does seem that the odds of a substantial economic turn-around in the near term have all but slipped away.
The percentage of NYSE stocks selling above their 30-week moving average is 9.3% this week. Clearly, sentiment has been extremely and unrelentingly depressed since October. Economic indicators give little reason for optimism as predictions for Friday’s 4Q GDP report envision an annualized contraction of 5.5%. Also, jobless claims to be reported later this week may be the worst yet. Risk aversion has taken hold in our economy as both consumers and businesses are reigning in their spending. According to the Wall Street Journal, 10 of the 13 major beneficiaries of TARP funding have contracted their outstanding loan balances to the tune of $46 billion. Remember that TARP’s purpose was to re-capitalize banks so that they would extend loans to American businesses. There is no question that the TARP program is showing signs of being a major flop, and yet there is a new TARP II plan that could make its way to President Obama’s desk in the next week.
Our asset allocation model, which utilizes the metrics selected above advocates above-average exposure to equities. However, although these metrics are at extreme levels leading to our conclusion that the market is oversold, this does not mean that we advocate buying stock willy-nilly right now. In light of recent developments, it is better to be cautious and nibble at positions in well run companies. Statistically-speaking, while it is highly likely that in future years stocks will trade a higher levels, in the mean time you may be able to add to positions in quality companies at still-lower levels.