The Wall Street Journal: Stocks in ‘Parallel Universe’ – Soon: ‘Bull Market’

Thursday, April 1, 2010

The Wall Street Journal took another step closer to calling this stock market a bull market. To me, “Equities in a Parallel Universe” (Heard on the Street, by Richard Barley, March 31) is their most bullish article yet, continuing their conversion.

Earlier, I discussed the media’s difficulty in using the label, “bull market” (“‘Bull Market’ Getting Closer as Name for This US Stock Rise,” March 19). The Wall Street Journal had taken a couple of tentative steps, and now we have a truly positive article, albeit still without the words, “bull market.” Here are two key quotes:

“One factor in favor of stock markets is the strength of corporate balance sheets.”

“Nor do equity valuations look too stretched: The U.S. 12-month forward price/earnings ratio of around 14 times is very close to a long-run average of 14.3 times going back to 1870, HSBC notes.”

Notice the use of “forward” (forecast) earnings. Many (most?) articles have used price/earnings (P/E) ratios based on past earnings. The first column in the table below shows those: 17 (16.5) for the DJIA and 20 (19.8) for the S&P 500. These are the numbers being tossed about to support the case that the stock market is overvalued. But using past earnings, especially 2009’s, gives us no insight into how investors value today’s stocks. Investors look ahead, not back, so we need to use market valuations based on what will be, not what was. These forward earnings give us P/E ratios 12 (11.9) and 13 (12.8). Far from being overvalued, the US stock market looks attractive.

Note: The article uses a 14 P/E ratio, not the 13 (12.8) shown below. The reason is the method of calculation. As I explain in “The Defect in Price/Earnings Ratios – Part 2” (November 18, 2009), average P/E ratios for indexes are often miscalculated.

Now for the coup de grâce. For many months, good news has had a “but” phrase, appending some negative counterpoint (see “Media Reports: An Indicator Worth Watching,” October 15, 2009).

Note: These counterpoints are not done maliciously. Rather, the media, carried along by the strong, negative current, simply cannot believe that the good news is part of a positive trend. They think that it must be an aberration.

Now look at today’s article, and how it packages a laundry list of worries at the end of the article:

“Sure, those macro risks are real. Potential flashpoints include….

“Short-term, equity markets could be vulnerable to a shock…. But with continued strong earnings, flexible balance sheets and accommodative monetary policy, stocks should ultimately prove resilient.

Look at that last sentence. The “but” precedes a positive counterpoint. This new usage of “but” could be the precursor of a media shift. And that is news!

So… Media recognition that we are in a bull market appears to be drawing closer.

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One Response to “The Wall Street Journal: Stocks in ‘Parallel Universe’ – Soon: ‘Bull Market’”

  1. UPDATE:

    The Wall Street Journal leapfrogged itself, using “Bull” in today’s article, “Bull Muscles Through Tumult” (By Tom Lauricella, April 1, page C-1). The tag line when you open the article actually reads, “Bull Market….”

    So, there it is – official recognition that this stock market is a true bull market. The article gives proper recognition to the uncertainties ahead, then lays out a number of the positive drivers – but not all. The large earnings leverage companies currently enjoy and the high growth rate associated with returning to normal are not discussed. Those items will come later – perhaps if/when the first quarter earnings reports exceed expectations.


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