US Stocks Hit Records in September 2013
Last month on September 18, the US stock index of the 500 largest companies, the S&P500, hit an all-time high. The previous all-time high was in early August. This chart covers 10 years, from 2003 to October 2013. Look on the far right side to see the September peak.
Were stocks getting too pricey, relative to corporate profits? After all, the US economy is growing slowly and corporate earnings growth is ok but not spectacular. Do we worry about a speculative bubble?
A recent analysis of the US economy and implications for US stocks by Liz Ann Sonders at Charles Schwab suggests that the US economy has a bright longer-term future, even if the Washington Follies represent cloudy skies now. And stock valuations are currently reasonable, certainly compared to previous market peaks.
In a nutshell, here’s Ms. Sonders’ reasoning:
- While the US economy is growing at a slow 2.2%, the private sector is growing at 3.3%, pretty close to the historical average. (Government spending continues to decline, so it’s a drag on the economy.)
- US manufacturing continues to grow, and is the single largest factor in the growth of the economy. US labor costs now compare favorably to international labor.
- US energy costs are declining due to domestic production which just passed imported energy for the first time since 1994!
- The S&P500 valuation now is well below the past peaks of 2007 and 2001, and is close to historical averages (depending on how you calculate those averages). A standard valuation metric compares the price of the stock to the profits of the company. A high valuation might mean the stock is overpriced.
Ms. Sonders sees long-term growth potential for large company US stocks, once the current government-induced crisis passes.