Winter Letter To Clients {Part II}

Below is Part II of our most recent letter to clients.

What Do You Think About The Markets?

Corporate earnings are being ratcheted higher as businesses tax rates decline from 35% to 21%. This potentially could support stock prices ass a surge in corporate earnings from the expected tax savings might make valuations look more reasonable.  I have not finalized my earnings estimates for 2018, but current estimates are in a range of $142-152 on the S&P 500.  That is a substantial increase from last year, if correct.  If we use a mid-point estimate on these numbers of $147 then the S&P 500 is currently trading with a 19 Price to Earnings ratio {PE}.  If the numbers come in closer to $152 then the index is trading with a PE of 18.50%.  That is elevated but again must be reviewed in the context of a market where earnings estimates are being ratched higher, and both inflation and interest rates are is still low.  

We use a device known as the Cone of Probability {COP} when trying to come up with a possible range for the S&P 500 in a given period.  Based on current inputs, we are using a COP between 2,400 and 3,200, with a midpoint of 3,050 for 2018. That midpoint represents currently about a 7% price appreciation potential from current prices.  Markets have already advanced about 6% so far in January.  Add nearly a 2% dividend and we think domestic US equities have the potential to see a further total return for 2017 between 7-9%.  Last year we used an initial COP of 1,950 to 2,500 on the S&P 500.  The index never traded anywhere near the lower-end of that range and closed out 2017 basically at 2,672.

The Cone of Probability represents a probabilistic assessment of a range where we think stocks have the potential to trade during a described time period.  Our analysis is based on many factors and is used solely for analytical purposes.  It will fluctuate with market conditions and changes to our data inputs.  Equity prices can and have traded outside of these ranges.  The data supplied here is for informational use only.  There should be no expectation that this price range will be accurate and there are no guarantees that this information is correct, nor should it be construed as a guarantee of price value.

**Long ETFs related to the S&P 500 in client and personal accounts.  Short S&P 500 in a personal account as part of a separate individual strategy.