Growth Prediction

This newsletter will cover the recent action in the stock market and look at future direction. The first segment is the weekly recap from Vanguard follow by my perspective on the stock market and lastly some trivia.

Vanguard Weekly Recap

The economy continued to show signs of weakness as the U.S. trade deficit widened at an unprecedented pace, the Federal Reserve announced it would continue its expansionary monetary policies, and deflationary fears continued even though consumer prices rose for the first time in three months. For the week ended August 13, the S&P 500 Index fell 3.8%, to 1,079 (for a year-to-date total return—including price change plus dividends—of about -2.0%). The yield of the 10-year U.S. Treasury note fell 17 basis points to 2.69% (for a year-to-date decrease of 116 basis points).

Growth Prediction

This week it seemed like we were watching baseball with all of the statistics flying around and the way markets reacted to it. It was like getting a batting average for a person to predict if a hit will occur. You know the stuff like batting average in August, against left handers, with a person in scoring position after the 3rd inning when eating oatmeal for breakfast. Okay, I made up the part with the oatmeal.

Data would be released and immediately it would go into a computer algorithm and out would come an answer of the future impact for the stock market and things happened. Forget anything about corporate earnings, they were meaningless unless it was negative and then it was another statistic to use to predict the future. The only thing that mattered was the latest statistic and what it meant in predicting future stock prices.

My favorite statistic was retail sales for July was up 0.4% instead of the expected 0.5% so things must be bad. Given the amount of shopping needed for each person entering the freshman year of college, including us, and my credit card balance, the August retail sales numbers should be huge. Enough has been purchased to fill the minivan and we still have 5 more shopping days to go.

Let's look at some data related to corporate earnings to see if this week made sense. On August 9th the expected 2010 earnings growth rate for the S&P 500 was raised to 35.2% from 33.5% while the expected 2011 earnings growth rate for the S&P 500 was reduced to 14.9% from 17.3%. Putting this into numbers, the aggregate earning for the S&P 500 companies was raised to $81 from $78 for 2010 and reduced for 2011 from $93 to $90. If we use a normal price to earnings ratio of 15 this equates to a S&P 500 index value of 1215 for 2010 and 1350 for 2011. Given that the S&P 500 index is currently at 1079.25 stocks appear to be undervalued.

Another indicator that I follow is the Volatility Index, ^VIX. The current value is slightly elevated, nothing compared to what we saw a few months ago and we are in a downward trend. This means that no big events are lurking like an European Union crisis, or BP oil spill disaster so no big down-draft exists.

So what does all of this mean? It means that in the short term the stock market is probably in a trading range with the Dow between the most recent low and high, about 9,600 and 11,300. Longer term, stocks are undervalued and remain as a good buying opportunity for a person with a longer term perspective.

Friday the 13th Trivia

Friday the 13th occurs when the thirteenth day of a month falls on a Friday, which superstition holds to be a day of bad luck. In the Gregorian calendar, this day occurs at least once, but at most three times a year. Any month's 13th day will fall on a Friday if the month starts on a Sunday. The fear of Friday the 13th is called friggatriskaidekaphobia (frigga meaning "Friday" and triskaidekaphobia meaning fear of the number thirteen), or paraskevidekatriaphobia, a concatenation of the Greek words Paraskeví (Παρασκευή, meaning "Friday"), and dekatreís (δεκατρείς, meaning "thirteen") attached to phobía (φοβία, from phóbos, φόβος, meaning "fear"). The latter word was derived in 1911 and first appeared in a mainstream source in 1953.

According to the Stress Management Center and Phobia Institute in Asheville, North Carolina, an estimated 17 to 21 million people in the United States are affected by a fear of this day. Some people are so paralyzed by fear that they avoid their normal routines in doing business, taking flights or even getting out of bed. "It's been estimated that [US]$800 or $900 million is lost in business on this day".