The price-to-peak earnings multiple advanced slightly to 9.9x this week while the stock market began to find relative calm in comparison to a turbulent October and November. Volatility has also diminished quite a bit as the days of huge swings have started to wane for the time being. That is not to say that the potential for volatility does not exist in this market climate, it most certainly does with the unpredictable nature of this market and the broader economy; however, the last few weeks have given investors an opportunity to pick up the pieces after a disastrously painful year. There is still great uncertainty regarding the near-term direction of the market and thus, potentially there is still significant downside risk in the short-term. We also see potential for a late December rally, but it will take a bit of good news since the “holiday spirit” will only get you so far in these generally lightly-traded weeks.
The percentage of NYSE stocks selling above their 30-week moving average improved to 7% this week, which is still an incredibly low percentage. There is no doubt we have been through some very dark days, as investors have endured the credit crisis, the housing crisis, unemployment, plunging consumer sentiment, inflation worries, deflation worries, soaring bankruptcies, government bailouts–the list goes on and on. However, sentiment has been so depressed since early October and the market is now selling at such cheap valuation levels that stocks are simply less susceptible to bad news. Conversely, this may also mean that the market will not respond very well to good news either. However, we believe that the market has already priced in a significant recession, even with the government doing all it can to minimize the damage, the market’s lethargy is itself an indicator that earnings may continue to be weak for some time.
There is little new to report as far as our asset allocation model is concerned. We believe that this is a time for long-term investors to seek out fundamentally strong companies because some have been oversold along with the market in this downturn. These are the stocks that will be the quickest to return to richer valuations because they are cheap compared to what the market has traditionally been willing to pay for a given level of sales and earnings. Companies that are well-managed and survive carnage like we have seen in 2008 will be well positioned to rebound strongly when better times return.
As a final note, we want to wish everyone a Merry Christmas and a Happy New Year from the Ockham Research Team. The EIG will not be delivered next week, so have a wonderful holiday and we will reconnect in the New Year.