We’re working our way through 2013 at what seems to me to be an alarming rate, summer is here and fall just around the corner. Whoa, slow down! In just 3 or 4 months the markets will be looking ahead to 2014, pretty much discounting the 4th quarter entirely. All eyes will be on the new year and the predictions for growth or lack thereof.
By now you’ve heard it said that markets are forward looking, that events that are anticipated are bigger market drivers than those that are happening in real time. That’s because the market participants are more concerned about future growth than they are about current earnings. With that in mind what is driving the market today? There has been a lot of bullish sentiment as witnessed by our progress in the indexes year to date. Folks must feel pretty good about tomorrow to be bidding up today’s prices based on their version of where the economy will be 6 months to a year hence.
There has been lots to feel good about. Analysts are predicting future corporate earnings that are markedly higher than those seen today and growth in corporate profits is what drives the prices of stocks. In addition to the expectation of those future earnings investors have grown more comfortable with the notion of stock market investing in general and as such they are willing to pay more for a dollar of earnings a year hence than they did a year ago. This multiple expansion is one of the reasons that stocks have continued their rise.
Of course that multiple of earnings that folks are willing to pay can change very rapidly. History tells us that this particular important driver of short term market returns is rather fickle. When people feel better they’ll pay more. But introduce some worry into the equation and watch those multiples shrink. It’s not the long term expectation for growth that changes so much as the mood of the market participants, swinging from optimism to pessimism (or vice versa) in a single day, week or month.
While stocks aren’t cheap (based on those multiples of earnings) they aren’t expensive either. What to expect going forward? We’ll count on fluctuation in prices over the near term along with growth over the long term.