Profit Confidential (www.ProfitConfidential.com), an e-letter published by Lombardi Publishing Corporation, a 28-year-old consumer publisher that has served over one million customers in 141 countries, cautions investors that after a stellar 2013, the stock market has had its worst start since 2005—a growing concern for investors wondering if the strong gains in 2013 will continue in 2014.
“The stock market has just put in its worst first-seven-days-of-the-year trading action since 2005, as concern over where key stock indices will head this year rises,” says lead contributor and financial expert Michael Lombardi. “Wall Street industry analysts believe that the S&P 500 will rise 4.8% this year, while market strategists believe the S&P 500 will see a decline of 2.3% this year. This tells me that even the professionals can’t figure out which way the market is headed.” (Source: “Targets & Ratings,” FactSet web site, January 2, 2014; http://www.factset.com/websitefiles/PDFs/targetsratings/targetsratings_1.2.14.)
Lombardi explains that, on a valuation basis, key stock indices are reaching dangerous levels. Based on the closing price of the S&P 500 on December 31, the forward 12-month price-to-earnings multiple (P/E) was 15.4; this is the highest forward P/E ratio since May of 2007, the peak before the market crash. On top of that, optimism among stock advisors towards the key stock indices is getting into dangerous territory. Optimism towards key stock indices is at the same level as it was in 2007, while the number of those who are bearish is at a multi-decade low. (Source: FactSet, January 6, 2013.)
“As we move into 2014, I am one of the very few left who are saying key stock indices are dangerously overbought and overpriced,” he adds. “And if we take a survey of the global economy, things are looking increasingly bleak.”
China’s manufacturing activity recently witnessed a shakedown. The HSBC China Manufacturing Purchasing Managers’ Index (PMI) declined to a three-month low in December. India also continues to see its manufacturing base weaken; according to the Indian Statistic Ministry, production at Indian factories declined for the second straight month in November. (Sources: Wang, A. and Standing, J., “China factory activity surveys confirm slowing momentum,” Reuters web site, January 1, 2014; http://www.reuters.com/article/2014/01/02/us-china-economy-pmi-idUSBREA0000Y20140102; Singh, R.K., “India’s industrial output shrinks, trade gap widens,” Reuters web site, January 10, 2014; http://in.reuters.com/article/2014/01/10/india-economy-output-idINDEEA0704B20140110.)
According to Lombardi, Britain is in a very similar situation. The Office for National Statistics reported that the index of production, which tracks production by the sixth largest economic hub in the global economy, currently sits around the same level as it did back in July 2013. Canada is also experiencing an economic slowdown, as the job growth rate declined more than 67% in 2013 from 2012’s numbers. (Source: “Index of Production,” Office for National Statistics web site; http://www.ons.gov.uk/ons/rel/iop/index-of-production/index.html, last accessed January 21, 2014; “Labour Force Survey, December 2013,” Statistics Canada web site, January 10, 2014; http://www.statcan.gc.ca/daily-quotidien/140110/dq140110a-eng.htm.)
“The global economic slowdown in manufacturing and demand cannot help but have an impact on the U.S. economy. That’s because economic activity in the U.S. is highly correlated with the global economy; in fact, almost half of the S&P 500 companies derive revenues from outside the U.S.,” Lombardi concludes. “With the S&P 500 trading at its highest forward P/E ratio since May of 2007 and the global economy clearly slowing, key stock indices could surprise investors to the downside in 2014.”
Founded in 1986, Lombardi Publishing Corporation, which has served over one million customers in 141 countries, is one of the largest consumer information publishers in the world. For more information on Lombardi Publishing Corporation and Profit Confidential, visit www.lombardipublishing.com.
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