The flip side of what’s been the third-worst month for American stocks in the postwar era is that prices are a whole lot cheaper than they were before the rout.
While it may take a strong stomach to nibble at U.S. equities, they do offer the most attractive valuations since 2013, measured by the price-to-earnings ratio for the S&P 500 Index in data compiled by Bloomberg. At little more than 13 times the coming year’s estimated earnings, American stocks are also looking less of an outlier versus other advanced markets than earlier this year.
“Relative to the stretched valuations we have seen for U.S. indices in 2017, the current levels certainly appear more attractive,” said Jingyi Pan, market strategist at IG Asia Pte. in Singapore. “That being said, just as markets overlooked the high valuations and focused on the growth potential through to the peak this year, the current lowered valuations alone do not make for buying reasons.”
President Donald Trump was less equivocal about American companies at the White House Tuesday: “They have record kinds of numbers. So I think it’s a tremendous opportunity to buy. Really a great opportunity to buy.”
In retrospect, the last time valuations were around current levels certainly proved a great chance to get in. The S&P 500 has handed investors a 56 per cent return since the start of the final quarter of 2013, a period that includes the near 15 per cent tumble in the index this month. And earnings growth has been much stronger this year than earlier this decade, a trend that many see continuing thanks to solid U.S. job and consumption growth.
“You’ve just got to wait for prices to get down to a level where somebody’s going to buy it -- I think it’s gone too far,” said Chris Rupkey, chief financial economist at MUFG Union Bank, referring to the U.S. stock market. “I expect it to recover from here certainly.”
Some sectors have dropped so much they’re even cheaper on an historical basis than the broad big-cap index. Financial shares have been beaten down thanks to a flattening in the U.S. yield curve, where Federal Reserve interest-rate hikes have pushed up shorter-dated rates while turmoil in stocks has contributed to haven demand for longer-dated Treasuries.
Valuations on energy stocks are also around their lowest since early this decade, hammered by the $30-plus a barrel collapse in the price of West Texas Intermediate crude since early October. Others aren’t as much of a bargain. The Dow Jones Industrial Average Index was less expensive as recently as early 2016, as was the Nasdaq Composite.
While few economists see elevated danger of an impending recession in the U.S., and indicators ranging from the job market to manufacturing PMIs suggest solid growth will continue, what gives some investors pause is broader concern about policy maker errors. Back in 2013, the Fed unsettled markets by warning that its quantitative easing was coming to an end. This time around, it’s an accelerating global withdrawal of liquidity, alongside unexpected question marks around the longevity of U.S. policy makers, that’s hurting confidence.
"After an extraordinary period of eight, nine years of quantitative easing from the major central banks, which topped out earlier in the year at $24 trillion -- that’s about a third of the market capitalization of all global equities -- now we’ve started seeing that go into reverse," said Simon French, chief economist at Panmure Gordon in London, on Bloomberg Radio.
Futures trading Wednesday in European hours suggested limited odds for a bounce in U.S. stocks as trading resumes after the Christmas break. Contracts on the S&P 500 climbed as of 10:07 a.m. in London Wednesday after swinging between gains and losses during the Asia trading day. Headlines raising doubts about Trump’s confidence in Treasury Secretary Steven Mnuchin were the latest source of disquiet, days after Bloomberg reported the president discussed firing Chairman Jerome Powell out of frustration over interest-rate hikes.
“Destabilization in institutions that we’ve come to rely on” is the key worry, said Julia Coronado, president and founder of MacroPolicy Perspectives LLC in New York. For now, the market correction hasn’t fed through to damage business confidence, but it will be important to monitor investment and spending plans, she said.