Here is TD Wealth senior analyst, Ryan Lewenza's August 12, 2011 U.S. Equity Market Update report.
Highlights include:
· Q2/11 GDP growth came in at 1.3%, well below expectations for growth of 2%. Even more disconcerting was the large negative revision to previous growth estimates, with Q1 growth being revised to 0.4%. The ISM manufacturing report for July declined to 50.9, resting just above the boom-bust level of 50. These two key weak data points help to highlight the fragile state of the U.S. economy and cause us to believe the probability of a recession has greatly increased. Presently, TD Economics is estimating 1 in 3 chance of a U.S. recession in the coming months
· Despite the weak economic backdrop, U.S. corporate earnings continue to shine with 76% of companies in the S&P 500 Index (S&P 500) exceeding earnings estimates and Q2/11 earnings growing at 12% Y/Y. We still expect healthy earnings for the year, but the disconnect between slowing growth and continued rosy forward consensus estimates will need to be resolved in the coming quarters, with expectations for forward estimates being revised lower.
· The one positive of a declining market is that valuations become more attractive, thus increasing forward rates of expected return. Currently, the forward P/E for the S&P 500 is at a very attractive 12.2x (12.5x trailing), which is well below its ten-year average of 16.5x.
· We recommend investors put some money to work at current levels, focusing new money on defensive, high-quality, dividend yielding stocks. However, given the uncertainty that exists, we recommend investors go slow as they redeploy funds and maintain higher than normal cash levels.
· Given the explosive decline, the U.S. stock market is extremely oversold on a number of technical measures, with our preferred oversold/overbought technical indicator – NYSE Percentage of Stocks Above 50-day MA – being in rarefied oversold territory at just 8%. Generally speaking, below 20% indicates oversold for this indicator and one of the key reasons why we believe we could see a short-term trading bounce over the next few weeks.
· In trying to isolate the potential end to this correction we will be closely monitoring the following: 1) a steep decline in bullish investor sentiment; 2) a bottom in the Shanghai Composite, which often peaks and troughs ahead of the U.S. markets; 3) a peak in U.S. Treasury prices; and 4) a peak in the Volatility Index.
With our recommendation to put some money to work at current levels, we will be shortly sending out a detailed list of Canadian and U.S. high quality investment equity ideas.
