Seven Weeks of Gains, Seven Equity Themes | Bob Doll

Great market summary from Bob Doll at Nuveen Asset Management:

  1. Economic data remains strong and hurricane effects have been surprisingly muted. Real third quarter gross domestic product was reported to be 3.0%, with nominal growth hitting 5.2%. Both numbers came in higher than expected, with nominal growth reaching its strongest pace since 2006.
  2. Home sales are increasing, demonstrating that economic growth remains broad. New home sales hit their highest level since 2007.
  3. The Federal Reserve is on track to increase rates again in December. We expect the central bank will enact its third hike of the year, while continuing to reduce its balance sheet. Fed policy remains accommodative, but is clearly normalizing.
  4. Corporate earnings are on track for another strong quarter. We are past the halfway point of reporting season, and the vast majority of companies have beaten expectations. On average, companies are ahead of earnings growth expectations by 4.9%.
  5. Stock buybacks appear to have slowed, but companies are still deploying cash in shareholder-friendly ways. From our vantage point, we are seeing companies pour more resources into hiring and modest amounts of capital expenditures.
  6. Tax reform prospects still appear uncertain, but we have seen progress on the regulatory front. While President Trump has struggled to enact his pro-growth legislative agenda, he has had success in rolling back regulatory enforcement. The financial and energy sectors in particular appear to be benefiting from less scrutiny.
  7. It is possible that tax reform will focus on corporate rather than individual rates. The most controversial aspects of tax reform are focused on possible changes to individual tax rates (such as arguments over the deductibility of state and local taxes). In contrast, corporate tax reform appears less controversial, as Congress seems to have broad agreement on the need to reduce corporate taxes and solve the issue of overseas profits. While still a small probability, Republicans may choose to separate the two issues and proceed solely on a corporate tax bill.

Economic growth remains muted but earnings are exceeding expectations. High levels of stock buybacks in the last few years must be playing a part.

Rising home sales are a bullish sign.

The Fed remains accommodative for the present but I expect increasing inflationary pressure to temper this next year.

Slow rates of investment remain a cause for concern and could hamper future growth — buybacks are cosmetic and won’t solve the low growth problem in the long-term.

Corporate tax reform would be a smart move, creating a more level playing field, while avoiding the acrimony surrounding individual tax rates.

Stage 3 of the bull market continues…..

Source: Weekly Investment Commentary from Bob Doll | Nuveen

Hardly an over-heated market

Discussions as to whether the stock market is over-priced normally imply that stocks are about to fall if valuations are too high. But history shows that this isn’t true. The euphoria of bull markets often outruns earnings multiples and only reverses when there is an unexpected fall in earnings.

Earnings multiples (the price-earnings ratio) may rise for two reasons:

  1. Stock prices are rising faster than earnings; or
  2. Earnings are falling and stock prices are declining at a slower rate.

S&P 500 Historic PE

The S&P 500 historic price-earnings ratio (based on the last 4 quarters earnings) spiked above 20 several times in the last three decades:

  • 1991 was caused by falling earnings;
  • 1997 by rising stock prices;
  • sharp falls in earnings were responsible for 2001 and 2008; and
  • declining earnings, particularly in the Energy sector, explain the bump in 2015.

The problem with historic PE is that it looks backward, at the last 4 quarters, rather than forward. If we take the Forward PE, based on the next 4 quarters earnings estimates, we can see that earnings are recovering.

S&P 500 Forward PE

Forward PE dipped below 20 in 2016, indicating that expected earnings are advancing faster than prices.

This does not signal a buy opportunity, which normally presents when Forward PE is close to 15:

  • 1988-1989
  • 1993-1994
  • 2002-2005
  • 2009-2012

S&P 500 and Forward PE

Nor does it represent a sell signal.

Most corporations (98.5%) have reported earnings for June 2017. Estimates are included for the remainder, giving total earnings of $27.00 per share.

S&P project that earnings will grow a further 20% over the next four quarters (Jun-18: $32.40). This may be optimistic but provided earnings grow faster than the index we will see earnings multiples decline.

S&P 500 Forward Earnings Estimates

Hardly an over-heated market.

Is the ASX over-priced?

On the weekend I discussed how earnings for the S&P 500 have grown by roughly 6.0% over the last three decades but the growth rate should rise as stock buybacks have averaged just over 3.0% a year since 2011. In an ideal world the growth rate would lift to close to 9.0% p.a. if buybacks continue at the present rate. Add a 2.0% dividend yield and we have an expected annual return close to 11.0%.

Forward Price Earnings Ratio for S&P 500

I conducted a similar exercise for the ASX using data supplied by marketindex.com.au.

The first noticeable difference is that earnings for the ASX All Ordinaries Index grew at a slower pace. Earnings since 1980 grew at an average compound annual growth rate of 4.4%, while dividends grew at a much higher rate of 6.3%.

Forward Price Earnings Ratio for S&P 500

How is that possible?

Well the dividend payout ratio increased from the low forties to the high seventies. An average of just over 60%.

With a current payout ratio of 77% (Feb 2017), there is little room to increase the payout ratio any further. I expect dividend growth to match earnings growth (4.4% p.a.) for the foreseeable future.

Buybacks are not a major feature on the ASX, where investors favor dividends because of the franking credits. The dividend yield is higher, at just over 4.0%, for the same reason.

So the expected average return on the All Ordinaries Index should be no higher than 8.4% p.a. (the sum of dividend yield and expected growth) compared to an expected return of close to 11.0% for the S&P 500. That is, if buybacks are effective in lifting the earnings growth rate.

Obviously one has to factor in expected changes in the (AUDUSD) exchange rate, but that is a substantial difference for offshore investors. Local investors are also taking into account franking credits which benefit could amount to an additional 1.4% p.a.. But that still leaves a grossed-up return just shy of 10 percent (9.8% p.a.).

I would have expected a larger risk premium for a smaller exchange with strong commodity exposure.

S&P 500 Price-Earnings Ratio rises

With 84.4% of S&P 500 index constituents having reported first-quarter earnings, 302 (73.84%) beat their earnings estimates while 77 (18.83%) missed. Forward estimates for 2017 contracted by an average of 4.6% over the last 12 months but not sufficient to raise the forward Price-Earnings Ratio above 20. That is the threshold level above which we consider the market to be over-priced.

Forward Price Earnings Ratio for S&P 500

Comparing the forward estimates for 2017 to actual earnings for 1989, we see that the market is expected to deliver a compound average growth rate of 6.0% over almost three decades.

With a dividend yield of 2.16%, that delivers a total return to investors of just over 8 percent.

Price-Earnings ratios fluctuate over time, so any improvement in the ratio should be considered temporary.

Buybacks have averaged just over 3 percent since 2011. The motivation for buybacks is that they should accelerate earnings growth but there is little evidence as yet to support this. As Reported Earnings grew at an average rate of 3.2% between December 2011 and 2016, below the long-term average.

A spike in earnings is projected for 2017 and 2018. Hopefully this continues. Else there will be a strong case for restoring dividends and reducing stock buybacks.

Forward P/E turns back up

Dow Jones Industrials

Dow Jones Industrial Average continues to climb, heading for a target of 21000. Rising troughs on Twiggs Money Flow signal strong buying pressure.

Dow Jones Industrial Average

The S&P 500 follows a similar path.

S&P 500

With the CBOE Volatility Index (VIX) close to historic lows around 10 percent.

VIX

However, at least one investment manager, Bob Doll, is growing more cautious:

“…we think the easy gains for equities are in the rearview mirror and we are growing less positive toward the stock market. We do not believe the current bull market has ended, but the pace and magnitude of the gains we have seen over the past year are unlikely to persist.”

Forward P/E Ratio

Bob Doll’s view is reinforced by recent developments with the S&P 500 Forward Price-Earnings Ratio. I remarked at the beginning of February that the Forward P/E had dropped below 20, signaling a time to invest.

Actual earnings results, however, have come in below earlier estimates — shown by the difference between the first of the purple (latest estimate) and orange bars (04Feb2017) on the chart below.

S&P 500 Forward Price-Earnings Ratio

In the mean time the S&P 500 index has continued to climb, driving the Forward P/E up towards 20.

This is not yet cause for alarm. We are only one month away from the end of the quarter, when Forward P/E is again expected to dip as the next quarter’s earnings (Q1 2018) are taken into account.

S&P 500 Forward Price-Earnings Ratio

But there are two events that would be cause for concern:

  1. If the index continues to grow at a faster pace than earnings; and/or
  2. If forward earnings estimates continue to be revised downward, revealing over-optimistic expectations.

Either of the above could cause Forward P/E to rise above 20, reflecting over-priced stocks.

Be fearful when others are greedy and greedy only when others are fearful.

~ Warren Buffett

S&P 500 Price-Earnings suggest time to buy

The forward Price-Earnings (PE) Ratio for the S&P 500, depicted by the blue line on the chart below, recently dipped below 20. In 2014 to 2105, PEs above 20 warned that stocks were overpriced.

We can see from the green and orange bars on the chart that the primary reason for the dip in forward PE is more optimistic earnings forecasts for 2017.

S&P500 Earnings Per Share and Forward PE Ratio

We can also see, from an examination of the past history, that each time forward PE dipped below 20 it was an opportune time to buy.

History also shows that each time the forward PE crossed to above 20 it was an opportune time to stop buying. Not necessarily a sell signal but a warning to investors to tighten their stops.

Sector Performance

Quarterly sales figures are only available to June 2016 but there are two stand-out sectors that achieved quarterly year-on-year sales growth in excess of 10 percent: Consumer Discretionary and Health Care.

S&P500 Quarterly Sales Growth

Interestingly, apart from Energy where there has been a sharp drop in earnings, sectors with the highest forward PE (based on estimated operating earnings) are the defensive sectors: Consumer Staples and Utilities. While Consumer Discretionary and Health Care are more middle-of-the-pack at 16.7 and 15.4 respectively.

S&P500 Forward PE Ratio by Sector

Nasdaq breaks its Dotcom high

Tech-heavy Nasdaq 100 broke through its all-time high at 4900, first reached in the Dotcom bubble of 1999/2000. Follow-through above 5000 would signal another primary advance. Bearish divergence on 13-week Twiggs Money Flow warns of medium-term selling pressure, possibly profit-taking at the long-term high.

Nasdaq 100

The daily chart of the S&P 500 also shows bearish divergence, but on 21-day Twiggs Money Flow, indicating only short-term selling pressure; reversal below zero would warn of a correction. Target for the advance is 2300*.

S&P 500 Index

* Target medium-term: 2100 + ( 2200 – 2000 ) = 2300

The chart below plots Forward PE (price-earnings ratio) against S&P 500 quarterly earnings. Apologies for the spaghetti chart but each line is important:

  • green bars = quarterly earnings
  • orange bars = forecast earnings (Dec 2016 to Dec 2017)
  • purple line = S&P 500 index
  • blue line = forward PE Ratio (Price/Earnings for the next 4 quarters)

S&P 500 Forward PE and Earnings

The recent peak in Forward PE was due to falling earnings. Price retreated at a slower rate than earnings as the setback was not expected to last. Forward PE has since declined as earnings recovered at a faster rate than the index. But now PE seems to be bottoming as the index accelerates. Reversal of the Forward PE to above 20 would be cause for concern, indicating stocks are highly priced and growing even more expensive, as the index is advancing at a faster pace than earnings.

Remember that the last five bars are only forecasts and actual results may vary. The only time that the market has seen a sustained period with a forward PE greater than 20 was during the Dotcom bubble. Not an experience worth repeating.

Defensive PE at a dangerous high

Low interest rates and the accompanying search for yield have driven the forward Price-Earnings ratio for Defensives to a 20-year high. This is likely to reverse when (not if) rates eventually rise. Cyclicals and Growth, however, still look reasonable.

7 golden rules for SMSF investors

I found myself nodding in agreement when I read this list from Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital. I have added my comments in italics.

Investing during times of market stress and volatility can be difficult. For this reason it’s useful for SMSF investors to keep a key set of things – call them rules – in mind.

1. Be aware that there is always a cycle
The historical experience of investment markets – be they bonds, shares, property or infrastructure – constantly reminds us they go through cyclical phases of good times and bad. Some are short term, such as occasional corrections. Some are medium term, such as those that relate to the three to five year business cycle. Some are longer, such as the secular swings seen over 10 to 20 year periods in shares. But all eventually contain the seeds of their own reversal. The trouble with cycles is that they can throw investors out of a well thought out investment strategy that aims to take advantage of long term returns and can cause problems for investors when they are in or close to retirement. In saying this, cycles can also create opportunities.

Most important is to identify the long-term, secular trends that may last several decades and position your portfolio to take advantage of this. Examples of secular trends are the ageing population in developed countries; the rapidly expanding middle-class in India and China; and global warming. Sectors that may benefit from them are Health Care and Consumables.

2. Invest for the long term
The best way for most investors to avoid losing at investments is to invest for the long term. Get a long term plan that suits your level of wealth, age and tolerance of volatility and stick to it. This may involve a high exposure to shares and property when you are young or have plenty of funds to invest when you are in retirement and still have your day to day needs covered. Alternatively if you can’t afford to take a long term approach or can’t tolerate short term volatility then it is worth considering investing in funds that use strategies like dynamic asset allocation to target a particular goal – be that in relation to a return level or cash flow. Such approaches are also worth considering if you want to try and take advantage of the opportunities that volatility in investment markets through up.

Invest for the LONG term, otherwise invest in low-risk assets (cash and near cash) and not clever strategies.

3. Turn down the noise and focus on the right asset mix
The combination of too much information has turned investing into a daily soap opera – as we go from worrying about one thing after another. Once you have worked out a strategy that is right for you, it’s important to turn down the noise on the information flow surrounding investment markets. This also involves keeping your investment strategy relatively simple – lots of time can be wasted on fretting over individual shares or managed funds – which is just a distraction from making sure you have the right asset mix as it’s your asset allocation that will mainly drive the return you will get.

True.

4. Buy low, sell high
One reality of investing is that the price you pay for an investment or asset matters a lot in terms of the return you will get. It stands to reason that the cheaper you buy an asset the higher its prospective return will be and vice versa, all other things being equal. If you do have to trade or move your investments around then remember to buy when markets are down and sell when they are up.

Very important but this requires loads of patience, waiting for the right time to invest in the market.

5. Beware the crowd and a herd mentality
The issue with crowds is that eventually everyone who wants to buy will do so and then the only way is down (and vice versa during periods of panic). As Warren Buffet once said the key is to “be fearful when others are greedy and greedy when others are fearful”.

This is simply a repeat of Buy Low Sell High.

6. Diversify
This is a no brainer. Don’t put all your eggs in one basket as the old saying goes. Unfortunately, plenty do. Through last decade many questioned the value of holding global shares in their investment portfolios as Australian shares were doing so well. Interestingly, for the last five or so years global shares have been far better performers and have proven their worth.It appears that common approaches in SMSF funds are to have one or two high-yielding and popular shares and a term deposit. This could potentially leave an investor very exposed to either a very low return oif something goes wrong in the high -yield share that they’re invested in. By the same token, don’t over diversify with multiple – say greater than 30 – shares and/or managed funds as this may just add complexity without any real benefit.

Diversify into asset classes, geographic areas and strategies that have low correlation but don’t diversify into asset classes that offer negative real returns (after tax and inflation) or high risk relative to low returns.

7. Focus on investments offering sustainable cash flow
This is very important. There’s been lots of investments over the decades that have been sold on false promises of high returns or low risk (for example, many technological stocks in the 1990s, resources stocks periodically and the sub-prime asset-back securities of last decade). If it looks dodgy, hard to understand or has to be based on obscure valuation measures to stack up, then it’s best to stay away. There is no such thing as a free lunch in investing – if an investment looks too good to be true in terms of the return and risk on offer, then it probably is. By contrast, assets that generate sustainable cash flows (profits, rents, interest payments) and don’t rely on excessive gearing or financial engineering are more likely to deliver.

Most important. Invest in businesses with strong brands, patents or other competitive advantages that give them the ability to generate stable earnings over the long-term. Invest in stocks that you are likely to never sell but leave to the kids in your will. Occasionally you may sell one that falters but this should not affect long-term performance if you are well diversified.

Final thoughts

Investing is not easy and given the psychological traps that we are all susceptible to – in particular the tendency to over-react to the current state of investment markets – a good approach is to simply seek the advice of a coach such as a financial adviser.

Short-termism is the biggest danger to your investment portfolio. Too often I see investors do the exact opposite of what they should: buy high, when everyone else is buying, and sell low when everyone is a seller. Your best approach is to regularly consult an investment specialist.

Source: SMSF Suite – 7 golden rules for SMSF investors to keep in mind

The Stock Market’s Missing Ingredient | Bloomberg View

Barry Ritholz discusses why military conflicts around the globe and civil strife in Ferguson, Missouri have little impact on market performance:

….None of this seems to matter to Mr. Market. He continues to power on, oblivious to issues that don’t affect corporate earnings. They have, by the way, been stellar, growing at a 9 percent annual rate. Meanwhile, interest rates are still low and inflation is subdued.

Rarely have conditions for market gains been so promising at a time when investor psychology has been so negative. Gallup reports that only 7 percent of those surveyed were aware of last year’s scorching [29.7%] gains in the Standard & Poor’s 500 Index.

via The Stock Market's Missing Ingredient – Bloomberg View.

Is the S&P 500 overvalued?

The daily press appears convinced the S&P 500 is overvalued and due for a crash. Yet the macro-economic and volatility filters that we use at Porter Capital and Research & Investment — to identify market risk so that we can move to cash when risks are elevated — show no signs of stress. So I have been delving into some of the aggregate index data, kindly provided by Standard and Poors, to see whether some of their arguments hold water.

The Price-Earnings ratio for the S&P 500 itself is not excessive when compared to the last decade.

S&P 500 Price-Earnings ratio

The bears argue, however, that earnings are unsustainable. One reason advanced for this is that earnings growth has outstripped sales, with corporations focusing on the bottom line rather than business growth.

Faced with weak domestic demand, large US corporates have actively sought to manage their expenses so as to meet and exceed the market’s expectations. Combined with the unwinding of provisions taken in the GFC, cost management has allowed US corporates to achieve a 124% increase in 12-month trailing earnings off the back of a 25% increase in 12-month trailing sales since October 2009.
~ Elliott Clarke, Westpac

That may be so, but any profit increase would look massive if compared to earnings in 2009. When we plot earnings against sales (per share), it tells a different story. Earnings as a percentage of sales is in the same band (7% – 9%) as 2003 to 2006. A rise above 9% would suggest that earnings may not be sustainable, but not if they continue in their current range.

S&P 500 Earnings/Sales

The second reason advanced is that business investment is falling. Westpac put up a chart that shows US equipment investment growth is close to zero. But we also need to consider that accelerated tax write-offs led to a surge in investment in 2009/2010. The accelerated write-offs expired, but the level of investment merely stopped growing and has not fallen as I had expected.

Westpac: US Equipment Investment Poor

Private (non-residential) fixed investment as a whole is rising as a percentage of GDP, not falling.

S&P 500 Price to Book Value

Lastly, when we compare the S&P 500 to underlying net asset value per share, it shows how frothy the market was before the Dotcom crash, with the index trading at 5 times book value. That kind of premium is clearly unsustainable without double-digit GDP growth, which was never going to happen. But the current ratio of below 2.50 is modest compared to the past decade and quite sustainable.

S&P 500 Price to Book Value

I am not saying that everything is rosy — it never is — but if sales and earnings continue to grow apace, and with private fixed investment rising, the current price-earnings ratio does not look excessive.

Dr. Ed’s Blog: Dividends, Buybacks, & the Bull Market (excerpt)

Ed Yardeni highlights that a surge in dividends and share buybacks is driving the current bull market:

Most importantly, during the current earnings season, US corporations continue to announce dividend increases and more share buybacks. Previously, I’ve shown that this corporate cash flow into the stock market–which totaled $2.1 trillion for the S&P 500 since stock prices bottomed during Q1-2009 through Q4-2012–has been driving the bull market since it began.

I have one concern: is this surge sustainable or was it precipitated by an increase in marginal tax rates for top income-earners and likely to slow along with earnings?

View chart at Dr. Ed's Blog: Dividends, Buybacks, & the Bull Market (excerpt).

2013 Profit Margin Expectations | Business Insider

Sam Ro writes:

Overall, Wall Street’s strategists are bullish on stocks for 2013 for various reasons.

One reason worth taking a second look at is expanding corporate profit margins, which are already at historic highs.

A slew of experts like GMO’s Jeremy Grantham, SocGen’s Albert Edwards, LPL Financial’s Jeff Kleintop, and John Hussman think these margins are unsustainable.

But the equity analysts and the companies they cover disagree……..

That is the medium-term outlook, but one has to question whether low effective tax rates and low interest rates are sustainable in the long-term. A weaker dollar has also boosted the conversion of offshore earnings but that is a one-off gain unless the dollar continues to weaken.

Read more at 2013 Profit Margin Expectations – Business Insider.

Ten companies most of S&P 500 Earnings Growth | The Big Picture

Barry Ritholz quotes Adam Parker at Morgan Stanley:

….88% of the S&P500 earnings growth for 2012 came from just 10 firms.

Makes you question whether earnings are sustainable — especially when the four biggest are Apple, AIG, Goldman Sachs, and Bank of America.

via 4 Companies Provided Half of SPX 2012 Earnings Growth | The Big Picture.

The Most Compelling Argument for Equities | Pragmatic Capitalism

Cullen Roche quotes David Rosenberg:

The Fed has also completely altered the relationship between stocks and bonds by nurturing an environment of ever deeper negative real interest rates. Therein lies the rub. The economy and earnings are weak, and getting weaker, but the interest rate used to discount the future earnings stream keeps getting more and more negative, and that in turn raises future profit expectations.

Cullen also refers to the spread between the S&P 500 dividend yield and the 5-year Treasury Note yield which has widened to 170 basis points (1.70%). What he has not considered is the upsurge in share buybacks over the last decade as a tax efficient alternative to dividends — which means the dividend yield is understated. The spread should be even wider.

via PRAGMATIC CAPITALISM – David Rosenberg: The Most Compelling Argument for Equities.

On Investment Time Horizons – Seeking Alpha

David Merkel observes that Shiller’s CAPE10 ratio and Tobin’s Q-ratio both “indicate that stocks are not likely to return a lot over the next 10 years”.

The CAPE10 ratio is a long-term, smoothed PE-ratio first popularized by Yale Professor Robert Shiller in his book Irrational Exuberance. CAPE10 compares the current S&P 500 index value to the average of the last 10-years annual earnings. James Tobin’s Q-ratio compares current price to net worth (total company assets minus liabilities).

Merkel points out, however, that “the same is true of most high-quality bond investments …. and high-yield investments when expected losses are netted out…..I am not crazy about buying bonds here. The risk-reward is awkward, but the same is true of stocks.”

Bottom line is investors are being starved of yield by the Fed’s Twist and QE3 operations. Investors may be forced to take on additional risk in order to boost yields, but that could end in disaster, with capital losses if yields rise or earnings fall. Where possible, the safest strategy would be to tighten your belt and sit this out.

via On Investment Time Horizons – Seeking Alpha.

New Jolt Looms for Investors: Earnings – WSJ.com

Jonathan Cheng: Companies begin reporting second-quarter earnings this week, starting with Alcoa Inc. (AA -2.19%) on Monday. Already, 42 companies—including Ford Motor Co. (F -0.73%) and Texas Instruments Inc. (TXN -2.43%) —have warned investors that profits will be lower than initially expected…….

Companies now are being hit on several fronts. Economies in China, Europe and the U.S. are slowing. That is hurting companies dependent on demand from those countries. As well, the U.S. dollar has jumped against the euro and other currencies, reducing profits made from international sales for U.S. companies.

via New Jolt Looms for Investors: Earnings – WSJ.com.

S&P 500 dividend yields signal oversold?

Historically the S&P 500 was considered overbought — and ripe for a bear market — when the dividend yield dropped below 3 percent. A surge in share buybacks in the past two decades, however, disrupted this relationship, with the dividend yield falling close to 1.0 percent in the Dotcom era.

S&P 500 Earnings and Dividend Yields

What happens when we adjust for share buybacks?

In 2011, S&P 500 share buybacks increased to $409.0 billion. With dividends of $298 billion*, that gives a total cash distribution (dividends and buybacks) of $707 billion for a yield of 5.44 percent. Right in the middle of the 5.0 to 6.0 percent range previously considered typical of an oversold market.

* S&P 500 market capitalization of $12,993 billion at June 29, 2012 multiplied by 2.29 percent

Unfortunately share buybacks fluctuate wildly with the state of the market:

S&P 500 Share Buybacks

If we omit the highest and lowest readings, and take the average share buyback over the remaining 3 years, it amounts to $349 billion. That would give adjusted total cash distributions of $614 billion and an adjusted yield of 4.98 percent — still close to the oversold range.

Compare to Earnings Yield

The current reported earnings yield of 6.8 percent, however, is way below the highs (10 to 14 percent) of the 1970s and 80s. Current distributions (dividends plus buybacks) amount to 80 percent of current earnings. Payout ratios above 60 percent are considered unsustainable.

My conclusion is that earnings yield offers a more accurate measure of value. And reflects a market that is fairly valued — rather than overbought or oversold — especially when we consider the likelihood of earnings disappointments.