Fantastic First Half of the Year for Equities
As the first six months of the year comes to an end, stocks globally have returned excellent numbers. As of Thursday’s market close, the S&P 500 is up a little more than 16.5%, while emerging markets are up 9.2% and Eurozone equities and Japanese stocks have increased 15% and 9.8% respectively.
The fear that stocks would pull back after a strong first quarter did not pan out for the bears. The bulls continued to dominate equities going into the second quarter and pushed up the S&P 500 from 13% at the end of Q1, to the levels we see today.
Despite geopolitical fears and the trade war with China, U.S. companies reported better than expected earnings in Q1, which helped make the case for equities. Q2 earnings season will begin in a few weeks and we will be looking for signs to give us a better indication if the rally still has legs.
As of now, things continue to look good for stocks. The forward 12-month P/E on the S&P 500 is a little over 16.5X earnings, which is just above the 5-year average.
From a valuation’s perspective, things do not look overpriced for stocks. However, not all stocks are equal. With the U.S. 10-Year Government Treasury bond at 2%, the case for dividend paying stocks continues. There are great companies out there with good valuations and a dividend yield twice as high as the 10-year government bond. Throw in a more favorable tax rate on qualified dividends vs bond coupons, and there is no competition that dividend stocks are a better bargain.
Earlier this year, Warren Buffett said, “If I had a choice today for a 10-year purchase of a 10-year bond at whatever it is … or buying the S&P 500 and holding it for 10 years, I’d buy the S&P.” Although well said, I would add that rather than buying the S&P 500, buying good companies that have consistently paid and increased their dividend is a better way to go.