JPMorgan has released its 3Q14 Guide to the Markets, a quarterly breakdown of macro data to set the stage for the coming quarter, and while the picture as always is mixed there seems to be plenty of reasons to be optimistic that the recovery is underway and markets aren’t completely out of bounds even if they are expensive.
Large-cap growth stocks cheapest; value stocks have best YTD performance
After the correction in growth stocks earlier this year it isn’t surprising that value stocks have had the best YTD performance regardless of market cap. What might be more surprising is that the correction didn’t bring growth stocks back into line, they are now below their long-term average PE and large growth stocks are the cheapest category relative to their own 20-year history. Value also had the best performance among mid- and small-caps in Q2, and value mid-caps are now the most expensive category of stocks (again, measured against their own average PE).
At 15.6x, the S&P 500 (INDEXSP:.INX)’s forward PE is exactly in line with its long-term average, though this says as much about optimistic outlooks on the US recovery as it does current stock prices. CAPE is at 25.6x compared to a 25-year average of 25.1x, price to book is 2.8x compared to the 25-year average 2.9x, and dividend yield is 1.9% compared to 2.1%. So the valuation picture is mixed, but none of these measures actually seem that far out of whack. The inversion of the earnings yield gap between the S&P 500 and Moody’s Baa is still in place, but that should continue as long as the Fed continues its loose monetary policy.
Global PMI shows signs of DM recovery
One of the more striking charts in this quarters Guide is global PMI, which shows how much progress the developed market recovery has made in the last two years (the top half of the chart, more or less). Even Greece, arguably the weakest economy in Europe, seems to be out of the danger zone, though it has stalled in the last few quarters. The US and the UK have both gained steadily, while Japan had the strongest PMI of the surveyed countries at the turn of the year but has since retreated.