Low Valuations Make The Market Attractive

The markets will probably trade higher over the next several months mostly because there are many asset classes that look attractive from a low valuation perspective. One is the Nasdaq-100 index, which has an ETF, symbol QQQ. QQQ is selling at a historically low multiple. Yahoo! Finance reports QQQ selling at about 15 times earnings. I went through records back to the year 1985, and QQQ has not sold in any year at a lower multiple. In the terrible bear market years of 2008 and 2009 the multiple was higher, 17.5 in 2008 and 34.7 in 2009. The Nasdaq 100 is a growth, big-cap, tech laden index, comparable only to like indexes. But other indexes are also selling at reasonable to low multiples, and the market could have a bigger upside move than many expect. Using earnings estimates from Yahoo! Finance, the outlook look promising. Nine companies comprise about 53 percent of QQQ, and the average earnings gain for the year 2012 of these companies is 18 percent. A random sampling of other companies in the index shows earnings increases also.

As far as global earnings, the outlook has been tempered but still has some promise. The Chung-hua Institution for Economic Research (CIER) slashed its 2012 growth forecast for Taiwan from 4.15 percent to 4.07 percent, due to the global slowdown. A Morgan Stanley economics team recently lowered their 2012 economic outlook for China. The team is now forecasting 8.4% GDP growth in 2012, down from a previous estimate of 8.7%. This is also a downward revision from a prior estimated growth of 9% in 2011. Also a survey by Wall Street Journal economists forecast a U.S. GDP of 2.8% in Q4, and then falling to 2.1% in Q1 2012. The U.S. economy is still being hurt by past excesses, with the housing sector continuing weak and related housing industries sub-sectors very slowly recovering. Consumers are paring back debt, which takes time and slows economic recovery. Government also is repairing its balance sheet, and this takes time and is difficult and hard to gauge its progress. Progress is slow and growth is hampered until these problems are lessened. U.S. export demand is affected by the Euro zone problems, which negatively affects the financial markets. Nevertheless, the Royal Bank of Canada believes that business investment will help improve economic activity by making substantial contributions. The bank forecasts real GDP to expand 2.5% in 2012 and 3.0% in 2013.

According to research done by Research Affiliates, and written about in my last book (Investing with Intelligent ETFs, McGraw-Hill, 2008), the asset classes that rebounded the sharpest were some of the ones that had declined the most. This could happen again. In the five years 1996 to 2000 emerging markets stocks were down 18 percent. This class was up 143 percent in the next five years, 2001 to 2005. Emerging markets could again be an outperforming class over the next five years. Emerging markets ETFs have underperformed the S&P 500 Index over the last two years, and have fallen out of favor. But these ETFs could outperform the S&P 500 Index, especially on a long-term basis. There are many ways to participate in this asset class, including the following ETFs: the big-cap EAFE ETF, symbol EEM, the dividend-paying WisdomTree ETFs, symbol DEM and DGS, and the fundamentally-weighted RAFI ETF, symbol PXH. Disclosure: My clients and I own shares of QQQ, EEM, DEM, DGS, and PXH.