S&P 500 To Correct By 10% Soon Yet End 2015 At Around 2500

The above introductory comments are edited excerpts from an article* by Clayton Browne (ValueWalk.com) entitled Jeffrey Saut: Ben Graham Method Shows Market Not Overvalued.

The following article is presented courtesy of Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!),  and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.

Browne goes on to say in further edited excerpts:

The introductory comments were made by Raymond James Chief Investment Strategist Jeffrey Saut, and colleagues Scott J. Brown and Andrew Adams, in the firm’s monthly market commentary** titled “Gleanings”. They maintain that we’re still in bull market cycle that has just begun to run and that the S&P 500 should reach somewhere between 2476 and 2545 in 2015.

The only fly in the ointment according to Saut is that we are currently entering a period of seasonal volatility, and that there is a good chance of a significant correction (could be up to 10%) in the next few months before the bull market cycle reasserts itself.

In his analysis, Jeffrey Saut points out that investing in the stock market is just “playing the odds” based on historical data noting that the stock market has been up or flat 59 out of the last 85 years, just over 69% of the time.

There are, of course, no guarantees, and any single year or even a decade can show negative returns, but long-term stock market investors are extremely likely to see significant profits.

Saut goes on to highlight that the Dow Jones Industrial Average (INDEXDJX:.DJI) has seen 8 structural/secular bull markets since 1896, and that each one lasted an average of 14 years.

Saut also takes on the argument that current price to earnings rations are too high. He notes that we are actually below historical P/E ranges, with stocks currently trading at 16.5 times this years earnings estimates and 14.3 times next year’s estimates.

Saut has an interesting observation using the Ben Graham formula, noting that: “While valuations are not as parsimonious as they were at the nominal and valuation low, stocks are not expensive, trading at 16.5x this year’s estimate ($119.45) and 14.3x next year’s estimate ($137.59).

Moreover, a case can be made that P/Es should actually expand using the “Rule of 20,” where the P/E plus the inflation rate should equal 20 implies a P/E multiple of 18…

Benjamin Graham observed that the average zero growth stock sold at 8.5x earnings and that P/E ratios increased at 2x earnings growth. Hence, Graham’s P/E formula, where the P/E should be 2x the earnings growth rate (5% TTM) plus 8.5, also suggests a P/E of about 18x…

Using either of those two formulas implies a 2015 price objective, based on next year’s bottom up/operating earnings estimate of somewhere between 2476.62 and 2545.42 (18-18.5 x $137.59) on the S&P 500 (SPX/1975).”

Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://www.valuewalk.com/2014/07/jeffrey-saut-ben-graham/ (© 2014 ValueWalk LLC All Rights Reserved); **http://www.bdfwealth.com/files/1732/Gleanings%207%2014%2014.pdf (© 2014 Raymond James & Associates, Inc)

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