Looking back on our commentary written in early January we see that the S&P 500 closed at 2,673.61. It now stands at 2,718.37 as of the close of the 2nd quarter – up a whopping 1.7% for the year. It’s hard to put a positive spin on that kind of return but in all reality, it really is not that bad. We have seen nine straight years of positive returns since the financial crisis in 2008. We are bound to give some back at some point…right? As an alternative we could have a consolidation year — A year that allows earnings growth to catch up with the index price. In fact, during the nine year run of positive returns, we have seen two years (2011 and 2015) where the index only rose by about 2%. In the years sandwiching these two years, the index was up double digits.
Focusing on a monthly return or quarterly return or even an annual return is often not productive. What happens over 3 years, 5 years, 10 years is a far better measure of your success. As we always preach, stock market returns will usually follow the money – specifically, the earnings. As go the earnings, so goes the market. Earnings growth and valuations continue to be our primary focus and with this latest consolidation phase, we have seen the Price to Earnings multiple (P/E) shrink from about 18.4x at the beginning of the year to about 17.3x today. This is terrific news for both of our focus objectives – earnings growth and valuations. In fact, as we take a peek into 2019 earnings estimates, we see that P/E valuation drops to about 15.5x which would be slightly cheap on a historic basis which perhaps could set us up for another double digit year in 2019. We will see what happens but this sideways action is welcomed in a way.