The S&P 500 finished August +3.13%, while the Nasdaq Composite finished +3.97% and the Dow gained 1.51%.
American equities had their seventh straight monthly advance — the longest winning streak since January 2018 — amid a tonic of strong corporate profits and moderate monetary policy. As the tapering debate heats up at a time when a coronavirus resurgence is delaying re-openings in some parts of the world there’s been concern about an overstretched stock market with the S&P 500 currently trading near its highest valuation levels since 2000. What keeps driving the S&P up? The reason is very clear, earnings.
Companies blew past estimates in second-quarter earnings season, primarily driven by stronger than expected revenue performance. Most importantly, nearly 60% of companies in the S&P 500 provided positive guidance, well above the five-year average of 37% according to FactSet.
One of my favorite Economists is Brian Wesbury of First Trust. He recently explained the reason he has raised his expectations of the S&P 500 putting a 5200 number on the index for his year-end prediction. As reference it is within a whisper of 4500 today. Why is he so bullish? He explains that corporate profits, reported by the IRS divided by the 10-year Treasury, all companies – not just the publicly traded ones, compared to the S&P 500 create an average relationship between the two groups. Recently the IRS reported numbers. Mr. Wesbury simply ran his comparative calculation versus historic norms and the results show the S&P as undervalued. Mr. Wesbury ran the numbers twice, once utilizing the current 1.3% U.S. Treasury rate and again utilizing a hypothetical 2.0% U.S. Treasury rate. His results show numbers from 5800 up to 6100 for the S&P 500 vs 4500 today. What can go wrong? Corporate profits could fall, or the U.S. Treasury rates could increase significantly. The Federal Reserve recently state that they are not moving rates anytime soon, so we are taking them at their word and not anticipating significantly higher rates. We must watch corporate earnings closely. In the final ½ of the year a significant headwind is the politics around tax hikes. While the debate is somewhat priced in, it could be the fly in the ointment.
Fun Facts about September:
- The Romans believed that September was looked after by the god of fire. So they always expected fires and volcanic eruptions to occur during this month.
- September is spelled with the most letters.
- This September Harvest Moon is the fullest moon of the year.
- September 17th is Constitution Day, which marks the day that the U.S. Constitution was adopted.
- Some of the best crops are typically harvested in September: onions, apples, raspberries, and tomatoes.
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