Capital Group Financial Advisor: US Stocks May Not Be as Expensive as They Seem

U.S. stocks would seem to be expensive. Markets are at historic highs. Investors are currently paying more than 21 times what companies in the Standard & Poor’s 500 have earned over the past 12 months, according to operating earnings from S&P Dow Jones Indices. Investors are paying well above the 18.8 average multiple they’ve paid for stocks since 1988, S&P data shows.

Don’t take this as a signal to sell, though, says Darrell Spence, an economist at Capital Group. Reading too much into this one data point could cause long-term investors to miss out on future gains. “It could be possible for the S&P 500 to post an increase in 2017, despite the full starting valuation,” he says.

Here are four reasons why long-term investors should look beyond the price-to-earnings (P/E) ratio:

1.The P/E ratio isn’t always a predictor of future stock movements.

Just because the market’s P/E ratio is high doesn’t mean stocks must fall. Several bull markets had plenty of life left even when the P/E ratio topped 20. You don’t have to go back far to find an example. The S&P 500’s P/E ratio has been above 20 since the end of the fourth quarter of 2015. But since then, stocks have added more than 10% as investors priced in better corporate profit growth. Even in the third quarter of 1992, the market might have seemed richly priced with a P/E of 21. But that was just the beginning of a major bull run that propelled stocks 157% higher, including dividends, in the following five years.

2. P/E ratios must be put into context.

When interest rates are low and the economy is healthy, investors can justify paying higher valuations for stocks, according to Spence. Companies’ future earnings are more valuable when rates are low. There’s little evidence rates are about to move higher soon, given the aggressive moves the U.S. central bank undertook to buy Treasuries, he says.

3. Companies can “grow into” valuations.

Market prices are only one part of the math that determines stock valuations. Corporate profits are the other. If earnings growth resumes, as Spence expects it will in 2017, stocks can justify their current valuations and then some. S&P 500 companies could boost their operating earnings per share this year by 13%, he forecasts. At current prices, if earnings grew 13% in 2017, stocks would be trading at 18.6 times trailing earnings.

4. Economic tailwinds can make stocks more valuable.

Higher valuations can be justified by a number of factors. Economic activity in the U.S., for instance, is improving. Risks of economic distress are low and the new presidential administration is promising stimulative fiscal spending on infrastructure projects, not to mention tax cuts.

But perhaps most importantly, the Federal Reserve has been slow to increase interest rates while other central banks around the world are still working to keep their interest rates low to stoke economies. Low bond rates translate into higher P/E ratios when the economy is healthy, Spence says.

There are risks. A sharp rise in interest rates could change the math and make stocks suddenly look more expensive. A change in direction by the world’s central banks to take away the monetary stimulus could also make stocks more pricey. A strong U.S. dollar could also hurt U.S. companies’ exports.

So despite valuations that would appear stretched, there’s still opportunity in the market. Investors might have to just mute their expectations. What’s reasonable? Add the economy’s hypothetical growth of 2.5% to the expected inflation rate of 2.5% and the S&P 500’s dividend yield of 2%, and that could correspond to a 7% expected total return for U.S. stocks.

“Is the P/E ratio a perfect indicator of the future? The answer is no,” Spence says.  “But higher valuations still appear sustainable.”

Galveston Financial Capital: Success Stories

GCSBDC Helps Make Local Take-Out Delivery A Possibility

Anthony Vela, CEO of Space City Takeout, LLC located in the Clear Lake area started his business in April 2012. A popular business industry on the West Coast, his idea has taken off very well. Space City Takeout provides meal delivery from local restaurants to hotels, businesses, and residential customers. He has expanded his catering services to local corporations in the area. His company is continually adding more restaurants providing more variety for his customers.  His residential customers say, “Space City Takeout is a fantastic service for after you get home from work and just don't want to drive anymore. Their prompt courteous drivers are a great alternative. Give them a try and I am sure you will be hooked like us.”

Mr. Vela started his company with his own capital and has grown very rapidly for the last two years with a profit so far for 2014, largely due to his keen sense of business and a determination to succeed. The company has a growth of 706% from 2012 to 2013.  As of 2013 to 2014, it is currently about a 200% growth rate. The residential database was 274 people in 2012, 1754 in 2013 and 2955 as of today. His company works with 18 restaurants and services 28 Hotels and approximately 200 businesses. Vela says, “Restaurants that partner with Space City Takeout benefit by receiving incremental sales that positively affect their bottom lines.  It is simple takeout orders for the restaurants. These sales are generated through Space City Takeout's marketing utilizing a variety of print and digital methods targeting busy professionals who have a need to have their food delivered. The marketing methods used to generate sales to restaurants include targeted mailed menu guides, postcards, SEO/SEM, social media and newspaper inserts etc..."

Due to his rapid growth, he has recently obtained his first business loan for working capital to assist with expansion. He has gone from 5 employees to 13 at this time and continues to grow.

When Anthony first became a client of Galveston County Small Business Development Center in Texas City his successful business was only in the “idea stage”.  The SBDC has helped him since conception to prepare a business plan, set up QuickBooks for his bookkeeping records, offer him management guidance, marketing, strategic planning advice, and assistance with the search for and request funding for growth. Anthony knows the SBDC Business Advisors are here for him every step of the way in his business. 

GCSBDC Assists Local Business Woman in New Venture

Janice Weatherspoon has worked with the GCSBDC since the start of her business when the GCSBDC assisted her in getting a business loan to start her day care business with 6 employees.   She has continued to work with the GCSBDC to acquire the business management skills she needed to continue in business and to create 19 new jobs.

Janice being the entrepreneur that she is decided that the vacant space next to her daycare was the perfect place for her new venture. Janice opened A Brighter Day Arts & Event Center in 2014. The event center boasts private meeting rooms, full kitchen, state-of-the art sound system, dance floor and much more.

Janice knew that the GCSBDC was with her every step of the way. From utilizing Quickbooks to obtaining loans Janice knew that the GCSBDC would help her to get where she wanted to go. 

Careconnect Health Insurance Group Review: How Much Water Do You Really Need?

Google “how much water should I drink each day,” and you get upwards of six million hits -- half of them, probably, telling you to drink eight 8-ounce glasses every day and the other half telling you to ignore that advice. Here’s the good news: Most healthy people drink enough water and other liquids by simply responding to their thirst (which is the first sign of dehydration), says Nancy Copperman, RD, assistant vice president of public health and community partnerships for Northwell Health. Still, Copperman says, people do make a number of common mistakes when it comes to staying hydrated in the heat. Here are her rules for healthy summer drinking:

1. Eight isn’t enough.

The eight-by-eight rule (eight 8-ounce glasses of water daily) may be easy to remember, but the current recommendations for daily fluid intake from the Institute of Medicine are actually even higher: about 13 cups a day for men and 9 cups a day for women. That may sound like a lot, but it becomes less daunting if you spread your liquid refreshment throughout the day -- definitely the best way to do it, says Copperman.

2. Your needs change with the weather (and your altitude…and other factors).

Think of the IOM recommendation as a baseline, but know that you may need to drink extra if you’re exercising, or if you’re in a hot or humid environment. Women who are pregnant or breastfeeding should also get additional fluids, as should anyone at a high altitude. “If you live on Long Island and you’re vacationing in the mountains, you should drink more than you normally would,” says Copperman.

3. Tea and coffee count toward your total...

“We used to think that coffee and tea were dehydrating because caffeine is a diuretic,” says Copperman, “but studies have found it really doesn’t have a major effect.” So it’s fine to drink coffee and tea as part of your daily fluid intake. Just make sure you’re not only drinking caffeinated beverages throughout the day, because that can cause other health issues. And limit milk and sugar, which add calories.

4. …but steer clear of soda.

Yes, soda is a tasty way to rehydrate – but it’s a major source of empty calories. What’s more, studies have shown that a habit of drinking soda or other sweetened beverages raises your risk of diabetes. If you’re engaging in strenuous activity for more than 30 minutes, a sports drink containing electrolytes and a modest amount of sugar can be helpful. In general, though, your best defense against dehydration is water.

5. Tired of drinking? Try eating your water.

Watermelon is about 92% water, according to the Physicians Committee for Responsible Medicine – and cucumber has it beat at 97% water. Even fruits and veggies that are less obviously water-logged, like cauliflower and spinach, can be good sources of H2O. So are liquid-based foods like soups, puddings, and popsicles. Want to get your fluid the trendy way? Coconuts are a hydration gem, says Copperman. She recommends plain coconut water (with no sugar added). Not only does it contain electrolytes like potassium, it has a naturally sweet taste. To your health!