Last week, major U.S. indices posted strong gains. That’s welcome news, but the drivers behind share price appreciation appear to have little to do with company fundamentals.
Fourth-quarter earnings season is underway. During earnings season, companies let investors know how profitable they were during the previous quarter. With 45 percent of companies in the Standard & Poor’s 500 (S&P 500) Index reporting, earnings are slightly down. If the trend continues, this will be the fourth consecutive quarter of year-over-year earnings declines, according to FactSet.
Falling company profits, in tandem with rising share prices, have made U.S. stocks relatively expensive. The price-to-earnings ratio of the S&P 500 Index was 25.04 on Friday. That’s significantly higher than its long-term average of 15.78.
Expectations for economic growth may have been behind last week’s gains. Axios reported, “U.S. economic data had been strengthening ahead of the [coronavirus] outbreak – last month the all-important services sector notched its best reading since September, a private payroll survey showed the highest job growth in five years, and consumer confidence held at historically high levels.”
The Economist Intelligence Unit (EIU) estimates U.S. economic growth will be 1.7 percent in 2020, although the coronavirus could create issues that slow growth.
Economic growth also could be inhibited by the national debt. The Federal Reserve Bank of St. Louis showed U.S. debt at about 105 percent of gross domestic product (GDP) at the end of the third quarter of 2019 (GDP is the value of all goods and services produced by the United States). According to the Council on Foreign Relations, high levels of debt can slow economic growth and divert investment from infrastructure, education, and research.
Ben Levisohn of Barron’s suggested last week’s gains might have been the result of limited supply and high demand for U.S. stocks, “…because the world’s problems might actually make U.S. markets more attractive.” Stock market gains may also owe something to supportive central bank policies.
During the next few weeks, stay calm and expect some volatility.
Valentine’s Day: Why Chocolate?
The celebration of Valentine’s Day is attributed to Geoffrey Chaucer who wrote a poem about love and St. Valentine in the 1300s. Although this poem did not mention chocolate, the tasty treats have since become a Valentine’s Day tradition.
Drinking chocolate was popular across Europe in the 1600s. Its association with St. Valentine’s Day occurred in the mid-1800s when an entrepreneur found an ingenious way to use leftover cocoa butter from his company’s production of 16 varieties of drinking chocolate.
The entrepreneur invented eating chocolate and packaged several pieces together in elaborate boxes that could be used to store mementos such as dried flowers, locks of hair, and love letters once the chocolates had been eaten. It was a gift with lasting value. Even today, Victorian chocolate boxes are collectors’ items.
If you’re looking for a gift with lasting value, contact your financial professional to review your current plan or to learn more about financial planning.
We hope you have a sweet Valentine’s Day!
Weekly Focus – Think About It
“It is better to be hated for what you are than to be loved for what you are not.”
–Andre Gide, Author and Nobel Prize winner