Earlier this week a friend asked me about the recent volatility in Capital Markets … which by the way are really just going back to normal times ….
My Answer ….
“We got ahead of ourselves and valuations are a bit high!”
His comment …
“No way, earnings are good, markets cannot be overvalued!”
Let’s take a look and see for ourselves?
Check Points on Current Valuations
Price Earnings of the S&P 500
Currently 24 with a long term average of 15
Shiller or CAPE Price Earnings – 10 year average Price Earnings
Currently 32 with a long term average around 17
Price to Book Value
Currently 3.31 with a long term average of 2.75
So what does it all mean?
We are not WAY overvalued, overvalued compared to historical averages ….we are not cheap either …. but still maybe ahead of ourselves … leading to a good excuse for battle grounds and perceived volatility (again, really just back to the normal).
Want the Good News?
Right now earning are expected to grow about 15-20% this year. If they do, and the capital markets do not go up that much, (very likely) we are now less overvalued, and risk may be lower!
In true Groundhog like fashion, Capital Markets, after getting way ahead of themselves early in the quarter, saw their shadow only to turn, run and hide.
Included in the newsletter, which we sent early to give everyone a chance to view and remind of the tax strategies, is an article about the VIX and its reverse brother the XIV. These funny products along with the more recently noted tariff talk has been the recent excuse for capital markets to act like a bashful Groundhog.
The reality is capital markets got way ahead of themselves and needed time to rest. From our perch we would much rather them rest go sideways or even down a little bit, rather than getting WAY ahead of themselves like they did early in the quarter, only to quickly revert and likely overshoot to the downside.
Interest Rate Increase
In this most recent quarter we did just digest another small interest rate increase. Our new Federal Reserve Chairman Powell, looks to continue the gradual increase rates, slowly normalizing short term interest rates, and continuing on the path left by his predecessor Janet Yellen.
Capital Markets have a very unique way of signaling Interest rates have been raised too far called an inverted yield curve. Look for rhetoric about an inverted yield curve soon, as the historic importance and accuracy of this effect are in our crosshairs at this time.
Consumer and Earnings
With an economy that is two thirds driven by the consumer, a happy and spending consumer along with company earnings, which are beginning to digest the new tax reform, lead to a good backdrop.
As we mentioned in our Newsletters and repeatedly at street-cents, this is likely a year we will need patience, we see no change in that view at this time.
One of our favorite weekends … This one … because we get to watch the top professionals work their way around the finest manicured grounds of the August Georgia area.
Return to Glory
We are interested to see who makes a better return, the Capital Markets as they try to return to their glory … or Tiger Woods … trying to do the same.
Coming soon we have tons of neat stuff to talk about, and remind of a few tax items …
Un-like the three letter word that is most prevalent on OUR minds currently … TAX …
Capital Markets have concerns of a six letter word ….
Tariff
It’s such a little word, it almost needs to be bigger to show its’ importance…
Just in case you have not seen some of the rhetoric blowing capital markets around, the US and China are talking trade war, which is putting fear on everyone’s mind one day, then relief and rejoice the very next day … depending on the sound bite coming from each government official.
The reality is this will likely settle out some where in the middle. Most will be happy … and we go along our collective merry ways. Until then, expect extra spicy headlines followed by more volatile Capital Markets.
It even could be just another excuse to find our footing after we got ahead of ourselves ….hmmm
Final of FIVE Tax Savings Ideas you can do NOW for LAST Year’s (2017) Taxes
We completed the five part series … Three were let out of the box last month …. Let’s quickly review them and then the two final parts from this month!
HSA or Health Savings Account
Our post here, speaks of the terrific opportunity to set aside Pre-Tax dollars to use now or later for medical expenses.
SEP – Simplified Employee Pension
As mentioned in our Post Here, there are very high limits of contribution, and the SEP can be done during mandated RMD’s, as well as in tangent with a 401k program, as long as the upper limits collectively of contribution are not violated.
Pre-Tax Deductible IRA
As the one of the original retirement vehicles and so vintage many forget (We Don’t!) we want to remind here in our post about the IRA – Individual Retirement Account.
Tax Savings reach back reminders from THIS month/March
Maximizing the Sales Tax Deduction
Here in our post this month, we remind everyone to be sure and maximize your Sales Tax Deduction.
From the post …
Here are a few items that may make your standard sales tax deduction drastically inaccurate and woefully low- thereby costing you tax dollars:
Bought a large Asset – Think Car or other similar item
Had more then normal personal taxed expenses – for whatever reason
Large Taxable Asset of any kind purchased
Major expense where you paid sales tax – Think Wedding, Large Party
Be sure to maximize this deduction as it looks like the new tax rules will greatly mitigate it’s use moving forward.
Medical Expense Deduction
We all some type of medical expenses each year. What is a challenge if determining what is and is not deductible.
The IRS does a terrific job with their Publication 502 of reminding and outlining what may be a deduction. In our post here, we remind of a few favorites that we find are frequently missed …
Capital Expenses for home improvements
Transportation Cost
Television
Telephone
Are possible (check to make sure) deductions we find interesting and easily forgotten.
Capital Market Comments
Finding our Footing After Getting Ahead of Ourselves
Another month and our thoughts are the exact same…so much we did not even have to change the title of this part of the review from last month… the chart is updated … looks about the same…
We think patience is needed as this will take time to digest and again find our footing.
Patience will be needed!
Here is where we are now —
For those wondering …. for now, it looks like the 200 Day Moving Average (line below our trend line) is the lower level of support … It may break, which is fine, but for now, looks like someone wants it to hold.
We will keep watch and keep you updated!
Have a Great Day! Talk to you at the end of April!
This Newsletter was so full of tax related information, especially reach back to last year NOW savings ideas, that we published and sent paper copies early in the Quarter to beat the regular tax filing deadline.
Welcome to our Video and Audio Podcast Review of our Q 2 2018 Newsletter. For those on the road or just unable to grab the time to read, our podcast type review gives you the behind the scenes insight to our thoughts, observations and deep views of the entire Newsletter.
Click here for direct link to an electronic version (an early peek-good ole fashion paper versions are on their way to you shortly) and here for our Newsletter page
In likely the last year of this deduction due to changing tax laws, this deduction is given to most in a standard amount, but can be further enhanced under the appropriate situations.
If you had a big ticket item of any type that had sales tax, you likely will be above the standard given amount. Think back of when you purchased that car or other item. If it was last year, add all of your sales tax up as there is no limit to this deduction. (Phase outs may limit)
Note: Those in state income tax states are likely not a user of this deduction.
Forgotten frequently, we reminded recently in this post of the Medical Expense Deduction. In our Newsletter we really roll up the sleeves and attempt to remind everyone of the possible Medical Expenses you may have forgotten.
Publication 502, located here at the IRS website does a fantastic job of numbering the various deductions.
Home Improvements
Transportation
Television
Telephone
These are our favorite possibly forgotten Medical Expense Related Deductions.
If you are in doubt be sure to check the link to Publication 502 as we really can’t emphasize enough just how comprehensive their list is.
VIX and the XIV
In our detailed article in the Newsletter, we gest of the silliness of too aggressive investments.
When you pick up Penny’s in front of a giant steam roller … When the giant awakens …
Oops … it looks like this!
Much of the Volatility in the Capital Markets were sturred up by this event.
It may take some time to clear this completely. Patience!
Roth Versus IRA – AKA Pre-tax or After Tax
This is a super article that speaks to those who wonder if it is better to do a Roth or another type of Pre-Tax plan such as a 401k, IRA or SEP.
The answer to this question as mentioned in great detail in the Newsletter article is actually not that complicated.
The vast majority of people are in a higher tax bracket while working and lower while retired. If you are one of those people, Pre-Tax is better.
If you find yourself in a low income year/early earning, and expect your income to be higher in the future, a Roth might be better.
On word of caution that is included in our Newsletter .. Roth’s are often overused, so be careful.
Hope you enjoyed this slightly longer than normal summary and detailed review of our Newsletter – Podcast – Video, Review !
In our last Newsletter (Q1 2018) we ranted at length on the record breaking sleepiness of 49 times the VIX (Fear Gauge – low reading means no fear) had closed under 10 in the year 2017 after only closing below 10 a total of nine times prior to 2017 since the inception in 1990.
While we were warning of more normal times to come, money poured into a product that made money by a continued sleepy VIX or XIV.
We had no idea just how fast a return to normal would occur. Good timing or lucky, either way …. capital market returned to more NORMAL ways!
VIX versus the XIV
Just like in any other parts of life, fear goes up WAY faster than it goes down, or subsides.
Here is our chart, literally from our Newsletter – A very Sleepy VIX – fear gauge.
Looking back at the chart above one can easily see the VIX does not always sleep.
Fast forward to late January early February … the VIX awakened … like a sleeping giant, but not happy.
While we knew of Wall Street products that bet the VIX would remain asleep. We had no idea several billion dollars had found their way into these products.
We liken these money making, if sleepy VIX, products to picking up nickels in front of a steam roller … all good UNTIL!
Here’s what UNTIL looks like:
With several billion dollars (not any more) in these type of assets, when the VIX awakend and the opposite drop occurred, synthetic products became mandatory buyers and sellers of our fear index, the VIX … exaggerating capital market movement.
Just like in a traffic accident, this was not the only item that occurred, but this was another straw that helped awaken the sleeping giant!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, please consult your financial advisor prior to investing!
Background
The is the vocal portion of J.K. Financial, Inc. a Dallas Texas Based Fee Only Total Wealth Financial Planning Firm. Founded by John Kvale, a Dallas Texas Fee only Financial Planner and Total Wealth Manager.
A Few Data Points on Current Valuations
Earlier this week a friend asked me about the recent volatility in Capital Markets … which by the way are really just going back to normal times ….
My Answer ….
“We got ahead of ourselves and valuations are a bit high!”
His comment …
“No way, earnings are good, markets cannot be overvalued!”
Let’s take a look and see for ourselves?
Check Points on Current Valuations
Price Earnings of the S&P 500
Currently 24 with a long term average of 15
Shiller or CAPE Price Earnings – 10 year average Price Earnings
Currently 32 with a long term average around 17
Price to Book Value
Currently 3.31 with a long term average of 2.75
So what does it all mean?
We are not WAY overvalued, overvalued compared to historical averages ….we are not cheap either …. but still maybe ahead of ourselves … leading to a good excuse for battle grounds and perceived volatility (again, really just back to the normal).
Want the Good News?
Right now earning are expected to grow about 15-20% this year. If they do, and the capital markets do not go up that much, (very likely) we are now less overvalued, and risk may be lower!
Bottom Line … Patience this year will be needed!
Have a Great “Valuation Updated” Day!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com
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Posted in Investing/Financial Planning, Market Comments
Tagged CAPE Ratio, P/E Ratio, Price to Book, Valuation Update