Download Regarding the recent declines in the equity market, it is difficult to

Regarding the recent declines in the equity market, it is difficult to say how long it will
last and how much lower the markets could go, but we believe the outlook for stocks
continues to remain favorable.
The chart below shows market price (S&P 500) relative to trailing 12-month earnings.
Based on the historic average of the average Price/Earnings ratio of 16.31, stocks are
fairly priced and trading at a P/E of 17.88. This is certainly within a reasonable range
based upon the strengthening economy and low interest rate environment.
However, the market typically prices in forward earnings and expectations of growth in
the economy. If the economy is expected to grow, it can be assumed that corporate
earnings will rise. Rising earnings translate into higher stock prices. Currently, the
consensus estimates are for 9% earnings growth in 2014 and 12% earnings growth in
2015. (Source: “U.S. Weekly Kickstart” Goldman Sachs October 10,2014)
A primary factor plaguing the market today is concerns over slowing international
growth. A third of S&P 500 earnings come from outside the U.S. There are two
potential negatives from this scenario. Weaker international growth means less
revenue, and a strengthening U.S. dollar means the revenue earned overseas will
decline in value.
In addition, exports are roughly 10-15% of the U.S. economy. Slowing growth overseas
is certainly impactful to the U.S. economy; however it is our view that these concerns
would not be sufficient enough to push the U.S. economy into recession.
Our position is based on the fact that some of the current concerns have potentially
positive ramifications to the equity markets. Weaker global growth means Central Banks
will likely keep interest rates low for a longer than currently expected time period. With
no evidence of inflation and little pressure to raise rates, the backdrop for continued
stock market appreciation looks promising.
Some other things to consider…
1. Oil has declined because new technologies have allowed the US to produce
more oil domestically than in the past. Because oil is used both directly and
indirectly, in so many as aspects of our lives, lower prices translate into lower
costs for businesses and greater discretionary income for consumers. This has
the potential to drive our economy forward in the coming years.
2. The Fed is considering raising rates because the economy is strengthening.
While it could potentially raise rates too much and/or too quickly, this would be
the first rate hike since July 2006. However, the Fed does not want to raise rates
too quickly. Many believe it stopped QE1 too early and QE2 too early. The last
thing the Fed wants is to slow the economy to the point where another round of
easing is necessary. Because of this, the Fed is likely to err on the side of being
too accommodative.
3. Major market selloffs typically occur when the economy is slowing. While a
disappointing earnings season, weaker job growth, an international credit crisis,
or a major geopolitical event could all exacerbate a market selloff, it is not likely
to be more severe and prolonged.
4. While geopolitical issues such as Russia and Ukraine, the Middle East and ISIS,
and the South China Sea (China vs. Japan), and the global Ebola situation, these
types of concerns tend to be transitory and tend to not have a material impact on
the long-term direction of the equity markets.
It’s tough to tell what will happen in the near term, but we would expect the markets to
continue to move to higher once we get through this pullback/correction.
The information contained in this report does not purport to be a complete description of the securities, markets, or
developments referred to in this material. The information has been obtained from sources considered to be reliable,
but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete
summary or statement of all available data necessary for making an investment decision and does not constitute a
recommendation. Any opinions are those of Provenance Wealth Advisors and not necessarily those of RJFS or
Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is an
inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise,
fixed income prices fall and when interest rates fall, fixed income prices generally rise. There is no assurance that
any of the trends mentioned will continue in the future. Past performance is not indicative of future results. There is
no guarantee that any forecasts made will come to pass.