Many are convinced that a US stock market correction, or even a bear market, is inevitable. So, when the S&P 500 was down 1.6% last Thursday, many thought it had arrived. Then, the S&P 500 rebounded and hit a new all-time high on Friday. Now, as I write this article the premarket numbers are down big yet again today. Tomorrow the market may rebound…
This does not mean the market always goes up. It doesn’t mean that the government is not creating future problems. But, I don’t try to time the market. What I do is focus on fundamentals, like profits and interest rates. And right now, I believe the S&P 500 is still undervalued.
Late last year, when the S&P 500 was at 3,638, I used those fundamentals to project a year-end 2021 target of 4,200, for an increase of 15.4%. However, with profits returning toward normal even faster than I had anticipated, the S&P 500 hit 4,185 in mid-April and I upped my projection to 4,500, which would be a full-year gain of about 19%.
Now, with the S&P 500 just 3% from my target, I’m choosing to stand pat. Why? I do not want to leave the impression that we are traders, shifting our target over and over. We are investors. It’s the long-term that matters. The US stock market has been undervalued relative to our Capitalized Profits Model since 2009.
My model takes the government’s measure of economy-wide profits from the GDP reports, discounted by the 10-year US Treasury note yield, to calculate fair value. If we use a 10-year Treasury yield of 1.36% (Friday’s closing yield) to discount profits (from the first quarter, the most recent available), then my model suggests the S&P 500 is 45% undervalued. And with profits likely to grow 20% or more this year, fair value will rise more as the year unfolds.
Right now, the Fed is artificially holding interest rates down across the yield curve. So, when I calculate our estimate of fair value, I use a 2.0% 10-year yield. Using this 2.0% rate gives us a fair value of 5,240. It would take a 10-year yield of about 2.4% for our model to show that the stock market is currently trading at fair value (with no increase in profits.) If rates do rise, because the economy is stronger than the Fed expects, it would likely be accompanied by even faster profit growth.
I fully understand that current monetary policy is inflationary, and that past government spending, plus what some politicians are asking for right now has lifted US Federal debt above 100% of GDP.
These policies could shift economic growth, the level of interest rates, and my estimate of the fair value of stocks in the years ahead. But for the foreseeable future, re-opening, easy money, and deficit spending are all pushing economic growth and profits up. With the Fed holding rates down and profits booming, and with our model saying stocks are undervalued, I remain bullish. And right now I think if our 4,500 target is wrong, it is likely too low.
Integrated Financial Group
My firm specializes in working with people that experience what we call “Sudden Income.” Typically the income came from one of these events:
1) Accessing and Managing Retirement Assets
2) A Performance Contract (Typically a Sports or Entertainment Contract)
3) Divorce Settlement
4) Inheritance or Insurance Payout
5) Sale of a Business or Stock Options
6) A Personal Injury Settlement
I believe the unique nature of these events requires specialized professional experience, empathy, and communication to deal with both the financial changes and the life changes that inevitably come with them.
My clients value my ability to simplify complex strategies into actionable plans. They also appreciate that I am open, non-judging, and easy to talk to about their dreams and fears. Each client defines financial success differently and my goal is to guide them from where they are now to where they want to be. As my client’s advisor, my goal is to provide them with a lifetime income stream, improving returns, protecting their funds, and managing taxes.
Firm Specialties:
-
- Retirement Planning For Business Owners & Executives
- Woman’s Unique Financial Planning Needs
- Professional Athletes
- Investment/Asset Allocation Advice
- Estate Planning
- Risk Management
- Strategic Planning
Kevin was listed in The Wall Street Journal as “One of the Financial Advisors In The Southeast That You Need To Know”
Kevin was listed in Forbes Magazine’s Annual Financial Edition as a Five Star Financial Advisor
Kevin has been awarded the Five Star Professional Wealth Manager in Atlanta Magazine in 2012, 2014, 2015, 2016, 2017,2018, and 2019.
Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of Five Star Wealth Managers.
KEVIN GARRETT, AWMA, CFS
Integrated Financial Group
200 Ashford Center North, Ste. 400 | Atlanta, GA 30338
Phone | 770.353.6311
Email | kgarrett@intfingroup.com
Website | kevingarrettifg.com
Thank you for visiting our Blog!
Jim Weber – Managing Partner, ITB Partners
I hope you enjoyed our point of view and would like to receive regular posts directly to your email inbox. Toward this end, put your contact information on my mailing list.
Your feedback helps me continue to publish articles that you want to read. Your input is very important to me so; please leave a comment.