Morningstar offers its paid subscribers a premium service called, “ETF Valuation Quickrank.” The company offers price-to-fair value estimates for several hundred ETFs that are based upon a proprietary analysis of the underlying stock holdings. At present, each investment is being labeled as fairly valued or overvalued; you will not a find a single fund — broad-based, sector, foreign — that is being described as undervalued.
Assume for a moment that the fundamentals-based ratings provider serves up reasonable valuations. With 2nd quarter earnings (excluding financial companies) expected to show declines for the recent quarter, can anyone really tie the stock market’s epic July rise to corporate profits? How about sales growth. With year-over-year revenue increases virtually non-existent, can anyone genuinely believe that success for U.S. equity investing relates to strong company fundamentals? In truth, the main things that move share prices in today’s environment reside outside of the balance sheets.
Federal Reserve policy and perceptions of policy are primarily responsible for the durability of U.S. equities. The S&P 500 might have hit an exorbitantly priced 1800 already had Chairman Bernanke not floated the notion that his institution could begin slowing down bond purchases. Yet there is very little chance the Fed will rock the apple cart. Incoming economic data will not support de facto tightening in 2013.
Nevertheless, speculation of the timing of the central bank’s exit plan may keep stocks range-bound in the months ahead. Moreover, range-bound treasury bonds should also keep a lid on stock gains. That leaves open the probability that yield-seeking pursuits may dominate the landscape once more. Master limited partnerships, real estate investment trusts, dividend payers from telecom to utilities — money managers looking for cash flow are revisiting the possibilities.
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