July 2024
The following facts and statistics describe the financial situation in the United States from January 1st to July 26, 2024:
· The S&P 500 is flat for the month of July; it is 14.4 percent year to date
· The S&P 500 P/E ratio currently is 28.48, trailing 12 months. It and has a forward P/E based on issued guidance of 20.6 (the 5-year average forward P/E is 19.3, and the 10-year average is 17.9).
· The NASDAQ is down 2.7 percent for the month of July and up 15.6 percent year to date.
· The Dow Jones Industrial Average is up 3.5 percent for the month of July and up 7.7 percent year to date.
RECENT STATISTICS AND ECONOMIC DATA THAT AFFECT INVESTMENT DECISIONS
The following statistics and data are important factors to consider when making investment decisions:
For Q2 2024 (with 41 percent of S&P 500 companies reporting actual results), 78 percent of S&P 500 companies have reported a positive Earnings Per Share (EPS) surprise[d1] and 60 percent of S&P 500 companies have reported a positive revenue surprise. (John Butter, FactSet).
For Q2 2024, the blended (year-over-year) earnings growth rate for the S&P 500 is 9.8 percent. If 9.8 percent is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q4 2021 (31.4 percent). (John Butters, FactSet)
The Personal Consumption Expenditures (PCE) price index (a favored index by the Federal Reserve) for June increased 2.5 percent. Prices for goods decreased 0.2 percent and prices for services increased 3.9 percent. Food prices increased 1.4 percent and energy prices increased 2.0 percent. Excluding food and energy, the PCE price index increased 2.6 percent from one year ago.
Real gross domestic product (GDP) increased at an annual rate of 2.8 percent in the second quarter of 2024 according to the "advance" estimate released by the U.S. Bureau of Economic Analysis. In the first quarter, real GDP increased 1.4 percent.
The increase in real GDP primarily reflected increases in consumer spending, residential fixed investment, nonresidential fixed investment, and State and local government spending that were partly offset by a decrease in private inventory investment. Imports increased.
Compared to the first quarter, the acceleration in real GDP in the second quarter primarily reflected an upturn in private inventory investment and an acceleration in consumer spending. These movements were partly offset by a downturn in residential fixed investment.
According to ADP Employment 150,000 jobs were added in June with an annual pay increase of 4.9 percent. Forty-two percent (63,000), of the 150,000 jobs added were in leisure and hospitality. “Job growth has been solid, but not broad-based. Had it not been for a rebound in hiring in leisure and hospitality, June would have been a downbeat month,” said Nela Richardson, ADP Chief Economist.
The number of job openings changed little at 8.1 million from March to April. Over the month, the number of hires and total separations were little changed at 5.6 million and 5.4 million, respectively. Within separations, quits (3.5 million), and layoffs and discharges (1.5 million) changed little. The next report is scheduled for July 30.
The unemployment rate currently is at 4.1. The number of unemployed people (6.8 million) changed little in June. These measures are higher than a year earlier, when the jobless rate was 3.6 percent and the number of unemployed people was 6.0 million.
The labor force participation rate, at 62.6 percent, and the employment-population ratio, at 60 percent, were little changed in June.
The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent on a seasonally adjusted basis in June after being unchanged in May. Over the last 12 months the all items index increased 3.0 percent before seasonal adjustment.
Core CPI (the index for all items except food and energy) rose 0.1 percent in June after rising 0.2 percent the preceding month. Indexes that increased in June include shelter, motor vehicle insurance, household furnishings and operations, medical care, and personal care. The indexes for airline fares, used cars and trucks, and communication were among those that decreased over the month.
Advance estimates of U.S. retail and food services sales for June 2024, adjusted for seasonal variation and holiday and trading-day differences -- but not for price changes -- were $704.3 billion, which is virtually unchanged from the previous month, but up 2.3 percent above June 2023. Total sales for the April 2024 through June 2024 period were up 2.5 percent from the same period a year ago.
The yield curve between the 2-year and 10-year Treasury Bonds currently is -.14 and currently in an uptrend in July. The last 6 recessions have happened after the 2-year and 10-year yield curve reversed and turned positive.
The Federal Reserve’s balance sheet currently shows $7.205 trillion in assets. The Fed’s balance sheet was at its highest in April 2022 at $8.965 trillion in assets. The Federal Reserve has reduced its assets by 19.6 percent. The Federal Funds rate is currently 5.25 to 5.5 percent, and the 30-day Fed Funds futures are pricing in a 46-basis point cut to the Fed Funds rate, which would bring the rate down to 4.79 percent in September.
QUESTION FOR CONSIDERATION
How can investors navigate through market volatility and make sound investment decisions in a turbulent financial landscape, especially when faced with significant fluctuations like the recent 35 percent increase in the Volatility Index (VIX)?
THE BOTTOM LINE
This past month has been marked by significant market turbulence, with the VIX soaring 35 percent. Such volatility can be unsettling for investors, but it is crucial to remain focused and to adhere to sound investment principles.
Investing successfully requires thorough research and due diligence. It is not about reacting to daily price fluctuations or to the performance of individual stocks or indices. Instead, it is about identifying strong companies, assessing their valuations, and adhering to a disciplined investment strategy. Moments of volatility are inevitable in the market. It is important to remember that successful investing is not about “timing the market” but rather about “time in the market.” Long-term investors understand that market fluctuations are a natural part of investing, and do not let short-term volatility derail their strategy.
One way to maintain perspective is to consider the standards required to be part of the S&P 500. Companies in this index must meet stringent criteria that serve as a reminder of the importance of maintaining high standards and guidelines when choosing investments.
The S&P 500 is widely regarded as one of the best benchmarks of American equities. It includes 500 of the most prominent publicly traded companies in the United States. Below are some key criteria that a company must meet to be included in this prestigious index:
Market Capitalization: A company must have a market cap of at least $13.1 billion. This threshold ensures that only companies of significant size and stability are considered.
Liquidity: The stock must be highly liquid. This is measured by the stock's trading volume, ensuring that it is actively traded and that investors can buy and sell shares without significant price impact.
Domicile: The company must be based in the United States. This criterion ensures that the S&P 500 represents the largest and most stable companies within the U.S. economy.
Public Float: At least 50 percent of the company’s stock must be available to the public. This excludes closely held shares, which often are less liquid and more volatile.
Financial Viability: Companies must have positive earnings in the most recent quarter and over the past year. This requirement ensures that only profitable, financially sound companies are included.
Sector Balance: The S&P 500 aims to represent the leading companies across all sectors of the U.S. economy. Therefore, inclusion often depends on maintaining this sector balance.
As an investor, adhering to stringent criteria similar to those used by the S&P 500 can significantly enhance your investment outcomes. Here is why:
Risk Mitigation: Applying strict criteria helps you identify companies with strong financial health and stability; this reduces the risk of investing in poorly managed or volatile firms.
Consistent Returns: Companies that meet rigorous standards often are better positioned to deliver consistent returns over the long term because of their established market positions and sound management practices.
Informed Decisions: Stringent criteria compel you to conduct thorough research and due diligence that leads to more informed investment decisions. This can help you avoid common pitfalls associated with impulsive or poorly researched investments.
Long-Term Growth: By focusing on companies with strong fundamentals you are more likely to invest in businesses that can sustain growth and profitability; this contributes to long-term portfolio growth.
Reduced Volatility: High-quality companies that meet stringent criteria typically are less susceptible to extreme market fluctuations; this provides a more stable investment experience.
A common piece of advice is to invest in companies you are familiar with. However, familiarity alone is not a substitute for comprehensive research. Just because you use or know a company does not mean it is a sound investment. Proper research involves analyzing various financial ratios and comparing them to the overall market and within the specific industry and against the company's own historical performance.
Key Ratios and Metrics to Consider
Price-to-Earnings (P/E) Ratio: This ratio measures a company's current share price relative to its per-share earnings. It provides insights into whether a stock is overvalued or undervalued.
Price-to-Book (P/B) Ratio: This ratio compares a company's market value to its book value. A lower P/B ratio can indicate that a stock is undervalued, whereas a higher ratio might suggest overvaluation.
Price-to-Sales (P/S) Ratio: This ratio measures a company’s stock price relative to its revenue. It is useful for valuing companies that may not yet be profitable. A lower P/S ratio can indicate a more attractive investment.
Debt-to-Equity Ratio: This measures a company's financial leverage by comparing its total liabilities to shareholders' equity. A lower ratio often indicates a more financially stable company.
Return on Equity (ROE): This metric measures a company’s profitability by revealing how much profit it generates with the money shareholders have invested. A higher ROE indicates more efficient use of equity capital.
Dividend Yield: For income-focused investors, the dividend yield measures the dividend income relative to the stock's price. A higher yield can indicate a good income investment provided the dividends are sustainable.
Earnings Growth: Analyzing a company’s historical earnings growth can provide insights into its future potential. Consistent growth often is a sign of a well-managed company with strong market demand.
Discounted Cash Flow (DCF) Analysis: This method evaluates the present value of a company based on its projected future cash flows, discounted back to today's value using an appropriate discount rate. DCF analysis helps determine whether a stock is undervalued or overvalued based on its future cash flow potential.
If you are unsure about what to look for in your investments, seeking the guidance of an investment advisor can be invaluable. An advisor can help you navigate the complexities of the market, conduct thorough research, and develop a robust investment strategy tailored to your financial goals.
While the current market volatility can be daunting, it is important to stay focused on your long-term investment strategy. By doing your research, investing in fundamentally strong companies, and adhering to disciplined investment principles, you can navigate through these turbulent times. Remember, it is not about timing the market, but the time you spend in the market that ultimately leads to investment success and that’s The Long and Short of It!