Valuation Check

November 25, 2019

It has been an exceptional year for stocks and the S&P 500 is hitting new highs.  The rally continues to be broad, with all the S&P 500 sectors but energy posting double digit gains this year.  Of course, it is at just these points that we begin to wonder how long the rally can last.  Certainly, the stock market is not cheap, but this rally is not merely based on speculation - there are good reasons for stocks to hit these fresh highs.  This Thanksgiving let’s give thanks for the good economic data that keeps pushing stocks higher.

 

Revenues

 

Stocks prices continue to rise because Companies continue to grow and expand.  The revenues for companies in the S&P 500 rose 3.9% this year.  While this is hardly a boom, corporation’s continued revenue growth is a strong economic sign.  Equally important are the expectations for continued revenue growth for 2020, currently at 4% to 5%, indicating even stronger revenue growth ahead.  There are no near-term expectations for recession in these numbers.

 

Unemployment

 

Unemployment during the month of October declined to 3.6%, including record low 5.4% unemployment among African Americans.  The job market in the United States has rarely if ever been stronger. 

 

Pay

 

With unemployment hitting record lows, earnings are showing strong growth as employers compete for workers.  Real earnings, meaning earnings after inflation, continues to climb higher.  Importantly, the productivity of workers also continues to rise, allowing companies to at least partially offset the higher wages with increased efficiency.

 

Consumer Confidence

 

Consumers are on board!  Consumer confidence is hitting 20-year highs.  Not since the dot-com boom has consumer confidence been so high, painting an optimistic picture for consumer spending in the months ahead.  Arguably the U.S. consumer is the driver of economic growth for the U.S. and to a large extent the world.  At this point U.S. consumers have rising earnings, low debt levels, and strong confidence in the future.

 

Inflation

 

Often, when the economy is strong inflation begins to rise.  At this point, despite the strong economic numbers, inflation is benign at 1.3% (as measured by the Personal Consumption Earnings Deflator).  Low inflation gives the Federal Reserve flexibility to let the economy continue running. 

 

Overall

 

Of course, there are things to worry about, but we’ll focus on the positives this Thanksgiving.  The reality is that the economy continues to be very strong and the stock market merely reflects the very strong fundamentals coming out of the U.S.

 

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