Market Forces. Power of the Consumer in Charts
Investors are watching the market a little more closely these days. For those of you who have been following this newsletter the past six years, you know that when I look at any investment I look at the quality of what we are buying and what price we are paying for it. In the following charts I want to give you a look into how I view the market at this time. These charts are all from the JPMorgan Guide to the Markets for First Quarter 2022.
Price We Are Paying
Overall, the price we are paying for U.S. stocks in the S&P 500 Index at the current time is higher than normal as measured by the price-to-forward earnings ratio. S&P 500 total return for the past three years has been 28.7% for 2021, 18.4% for 2020 and 31.5% for 2019. Exceptionally strong returns the past three years! The “S&P 500 valuation measures” chart below shows the Price to Forward Earnings (P/E) ratio at a high level. The middle green line is average.
There are two ways to bring this line back to average—prices need to fall sharply or earnings need to grow. The current earnings per share estimated growth rate for 2022 is 8.3% as quoted from Standard & Poor’s Indices Research. So far this year we’ve seen an estimated 4.1% earnings growth. This, coupled with a small drop in stock prices, has brought the P/E ratio down below the top green line. With earnings per share growing, stock prices can stay stable for the next year and make the price we are paying for stocks much more reasonable without stocks losing significant value.
Quality of Investments
Quality of investments is strong. I believe the consumer data found in multiple charts described below confirms that the economy and corporations associated with it have an opportunity for ongoing revenue growth. Consumer consumption and investments ex-housing made up 82.2% of Fourth Quarter 2021 nominal GDP growth. The ability of consumers to spend and drive revenue is key to market returns.
The job market is strong, with unemployment below 4% and wage growth above 6%. Despite inflation, employers are offering their employees the opportunity to increase wages. Job openings are significantly higher than they have been for 22 years. See “JOLTS job openings.”
The “Household debt service ratio” chart, below, shows that household debt is relatively lower than it has been in the past 42 years.
After saving significantly during COVID, on average consumers have just begun spending a little more than they have been saving. See “Flow of personal savings” chart below.
Despite all of this positive consumer data, consumer confidence in the stock market is the lowest it has been since April 2020. While it may seem like a lack of confidence would be negative, historically it has proven to be just the opposite for the stock market. The “Consumer confidence and the stock market” chart below shows that at every sentiment cycle turning point on the low side, the stock market has returned over 14% or more the subsequent 12 months. In March 2022, consumer confidence is at 59.4, a very significant low point. Looking back at the four times inflection points have been at this point or lower, the S&P 500 total return has averaged 19.75%.
Bottom Line. Stock market returns for 2022 may not be as strong as the past three years. However, with the recent market drop and overwhelmingly strong jobs and consumer data, it is very difficult to expect significant further downside from current levels.
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