Unnoticed Dip

May 26, 2021 - Published by IAG Wealth Partners

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When you are considering purchasing an item or service, which is more important to you – the price or the amount, quality, and usefulness of that item or service?

Pick amount, quality, and usefulness alone and you could pay thousands of dollars for the world’s best paper clip.

Pick price alone and you could end up owning a Yugo.

Yet, the general public typically only looks at one factor when judging how the stock market is doing – what did the S&P 500 Index do today?

The S&P 500 Index is a price. It is created using the stock prices of roughly 500 large- and mid-size U.S. companies weighted by how much they are worth (number of stocks shares times stock price).

If the index is the price, then what is the amount, quality, and usefulness that no one seems to ask about?

The answer is earnings. There are thousands of analysts all over the world that study these companies and estimate what their future earnings will be. Aggregating all of these estimates, we can gauge the estimated future earnings for the S&P 500 Index over the next twelve months.

Granted these analysts cannot predict the future any better than you and I no matter how hard they think. However, at least it gives us some sense of what we could be buying.

Between April 9 and May 21, the price of the S&P 500 Index moved from 4,128.80 to 4,155.86 – an increase of .66%.

During the same time period, analysts’ estimated earnings for the S&P 500 Index over the next twelve months rose from $183.26 to $196.59 – an increase of 7.27%.*

In other words, for .66% more in price you are now able to buy 7.27% more in estimated earnings than six weeks ago.

I call this an unnoticed dip. Certainly, if the S&P 500 Index fell by 7.27% over the last six weeks you would know about it and the media would be calling it a dip. However, since the price stayed relatively static, no one seems to know or care that the value received for that price increased substantially – an unnoticed dip.

This is not advice to buy stocks because they appear attractive. Continue to follow the personal risk budget we designed to help you stay on a path toward your goals.

However, this is advice to think beyond price whenever you see what the S&P 500 Index did today. You may just notice the previously unnoticed.

 

Quote of the week: Warren Buffett: “The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”

 


*Source: JPMorgan

Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. One cannot invest directly in an index.

Past performance is no guarantee of future performance. In fact, the opposite can be true. The information contained in this report does not purport to be a complete description of the securities, markets, or development referred to in this material. Investing involves risk including loss of principal.

Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

Photo by Markus Winkler on Unsplash

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