U.S. stocks are defying gravity…
Earlier this week, the Dow Jones Industrial Average closed above the important level of 18,000 for the first time since July.
The S&P 500 is close to breaking its July high too. And the NASDAQ, which tracks large tech stocks, is up 16% since February.
Foreign stocks are also rallying. The STOXX Europe 600, which tracks 600 “blue chip” European stocks, is up 16% since February.
• This has some folks wondering if stocks are back in a bull market…
As you may remember, the S&P 500 plummeted 11% in 6 days last summer. From its highs last May, it put in a 15% “correction.”
• E.B. Tucker, editor of The Casey Report, doesn’t think this rally will last…
E.B. is Casey’s “big-picture” guru. Regular readers know E.B.’s been bearish on U.S. stocks since they tanked last summer. In September, he said the six-year bull market was over. He titled that month’s issue of The Casey Report “R.I.P. 2009-2015 Bull Market”.
E.B. stands by his call. He thinks we’re seeing a rally within a bear market…
This recent rally, while impressive, does not technically put us into a new bull market. We need the S&P 500 to set a new high for that to happen. As of today, what we’re seeing is a powerful bear market rally.
E.B. says fundamentals aren’t fueling this rally…
You see, stock prices “discount” the future. When profits rise, investors assume profits will continue to rise and bid stock prices up. The higher a company’s outlook for future profit, the higher its share price. But if companies miss those earnings targets, look out.
The problem with the recent violent stock market rally is the fundamentals don’t support it. Earnings aren’t rising. They’re falling.
The chart below shows the S&P 500 and earnings per share (EPS) for companies that make up the index. You can see earnings topped out in 2014 and have been declining ever since. Companies are earning less money today than they were a year ago.
• Profits for companies in the S&P 500 have fallen for three straight quarters…
And they’re on track to fall for a fourth straight quarter. That hasn’t happened since the 2009 financial crisis…
As of Friday, about 35 companies in the S&P 500 had reported first quarter results. Based on these numbers, the S&P 500 is on pace to post a 9.3% decline in profits. That would be the biggest drop in profits since 2009.
Sales are dropping too. According to research firm FactSet, the S&P will likely post a fifth straight quarter of declining sales. Analysts expect sales to drop 1.3%.
• With prices rising and earnings falling, stocks are becoming more expensive…
The price-to-earnings (PE) ratio is a popular way to measure how expensive stocks are. Stocks can get more expensive in two ways. Prices can rise or earnings can fall. Both are happening right now…
We can see this by looking at the CAPE ratio, which is a version of the PE ratio that measures long-term valuation. Measured by the CAPE ratio, stocks are now 58% more expensive than their historic average. They’ve only been more expensive three times in history: before the Great Depression, during the dot-com bubble, and leading up to the 2008 financial crisis.
• We don’t trust a rally built on weak earnings and high valuations…
U.S. stocks are not a good investment right now. Earnings are the lowest they’ve been in a year, and prices are the highest they’ve been in almost a year. In other words, U.S. stocks are a worse deal today than they’ve been in more than a year.
If you own U.S. stocks, you’re risking a lot for the chance to make a little.
Instead of putting a lot of money into stocks, we recommend holding more cash and gold. Setting aside cash helps to avoid big losses if stocks tank. Gold, on the other hand, is a safe haven asset. It’s preserved wealth during history’s worst stock market meltdowns.
This year, gold is up 20%. It’s beaten the S&P 500 almost seven-to-one. If stocks fall like E.B. expects, gold prices could skyrocket.
• E.B. owns three gold and silver stocks in The Casey Report portfolio…
As you probably know, miners are leveraged to gold and silver prices. A 10% rise in the price of gold can cause the average gold stock to jump 30%, 40%, or even 50%. In other words, miners are a way to bet on higher gold and silver prices.
E.B. thinks gold and silver are heading much higher in the coming years. That’s why he recently added two gold miners and a silver miner to his portfolio. They’re already up 23%, 12%, and 20% in less than a month.
E.B. is also shorting (betting against) the weakest company in one of America’s most vulnerable industries. He says the good times are coming to an end for this booming industry. And he thinks the stock he’s shorting will crash 50% or more when this happens.
You can invest alongside E.B. by trying The Casey Report risk-free. Click here to learn more.
Chart of the Day
America’s big banks are sitting out this rally…
Today’s chart compares the performance of the S&P 500 with America’s six largest banks: Wells Fargo (WFC), J.P. Morgan (JPM), Bank of America (BAC), Citigroup (C), Morgan Stanley (MS), and Goldman (GS).
You can see all six banks have fallen this year. They’re down by an average of 9%.
The banking business is bad right now. Five out of the six companies reported declines in first-quarter sales. Their sales have dropped $10 billion, or about 9%, since last year. Profits plunged 24%.
These companies are the cornerstone of the U.S. financial system. Their bad results suggest the economy isn’t as healthy as most folks think.
Even worse, the U.S. stock market has never had a bull market without the participation of the financial sector. That’s according to J.C. Parets, a successful market analyst who publishes the website AllStarCharts.
Delray Beach, Florida
April 21, 2016
We want to hear from you.
If you have a question or comment, please send it to [email protected]. We read every email that comes in, and we'll publish comments, questions, and answers that we think other readers will find useful.