• So far in 2022 the S&P500 is down over 9% and the Nasdaq-100 is down over 14%. Many investors view the recent increase in volatility as an anomaly. However, history shows the S&P500 has had daily swings of 1% or more 448 times since the beginning of 2008. In this context it seems that last year’s stock market, which rose 28% but fluctuated with only around two-thirds its usual intensity, was the real anomaly.
• Since 1957 the S&P500 has averaged around one 10% decline and more than three 5% declines every year. Like many of these past corrections, the current market pullback seems to be disproportionately affecting higher valued stocks. S&P500 companies with low price/earnings (P/E) ratios have outperformed those with high P/E ratios by 11.5% so far in 2022.
• At the end of December the S&P500 traded at a high valuation of 22x forward 12 month earnings. Today, after the market pullback, the S&P500 trades at a more reasonable 19.5x valuation (its 5-year average is 18.5x). Additionally, when the equity risk premium sits at the level seen this past Wednesday the S&P500 has historically beaten the one-year return for the 10-year yield by an average of 11.8%. Clearly stocks still hold some value for investors.
• The estimate for S&P500 profit growth for the fourth quarter was 22%. This has concerned some analysts since it is equivalent to only around half the increase seen in the previous period. Yet, this estimated growth rate is still 2x the average rate seen over the past decade.