2018 is off to a very volatile start in the stock market. The S&P 500 hit an all-time high of 2,872 on January 26 of this year and today closed at 2582. After today’s close, the major indexes have corrected approximately 10.1% from the previous high on January 26. In total, however, the S&P 500 is only down 3.43% year to date. Many have said that a correction was overdue; this may be the correction which many market participants have been anticipating.
As you know, we follow a specific discipline regarding the sale or hedge of equity positions. The following is a chart of our indicator as of today’s market close. As you can see the S&P 500 short term indicator (as illustrated with the green line below) would have to fall approximately another 100 points before signaling a possible long-term trend change in equities. We are watching this closely and will certainly let you know if our indicator turns negative.
Valuations in the stock market have also come down. The forward price to earnings ratio has declined from approximately 18.9 to 17.2, based on the forward P/E. The historical forward price to earnings ratio is around 15.[i] Based on this information, there may be more downward pressure to come before stocks start to look cheap. However, we are entering first quarter earnings season and we anticipate some very good earnings numbers based on tax cuts and overall growth in the economy. Should earnings turn out to be strong it will further reduce price to earnings ratios.
As you may know, we are closing our third life settlement fund at the end of this month, which was created as an uncorrelated alternative to the stock market. For certain investors, this alternative may be appropriate for a portion of their portfolio. Should you have any interest in this fund, or know anyone with interest, please let us know and we will be happy to tell you more.
Have a great week.
viewpointsObservations and Updates from CCA
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