Key Data for the Week
Key economic data released this week:
The Australian sharemarket ended the final trading session of the week 1.4% higher on Friday, as the local ASX 200 continued its recent volatility. Gains were broad based, with Information Technology the only sector to close lower. Over the course of the week, the ASX 200 edged up 0.25%, as lockdown restrictions began to ease across the nation.
Materials stocks were the best performers in response to a rise in iron ore prices; Fortescue Metals advanced 4.2%, BHP rose 3.5% and Rio Tinto gained 2.5%. Goldminers also strengthened, with Evolution Mining, Newcrest, Northern Star and Saracen Minerals all closing up over 4%.
Boral slid 2.3%, after the company reported earnings from January to April fell 3% – 5% because of the bushfires and COVID-19 measures, while concrete sales slumped 16% in April due to the current pandemic.
Ramsay Health Care rose 3.2%, after the private hospital operator announced it had entered into a binding agreement with the NSW Ministry of Health to make its facilities available during the ongoing COVID-19 pandemic.
The Australian futures market points to a 0.59% rise today, driven by broadly stronger overseas markets.
European sharemarkets rose on Friday, boosted by mining stocks, following the release of better than expected Chinese industrial production figures. Roche gained 1.8%, after the pharmaceutical giant announced it would begin selling a new digital diagnostics product that could simplify and accelerate COVID-19 screening in patients. Despite Friday’s gains, European sharemarkets endured their worst weekly losses since mid-March, with the broad based STOXX Europe 600 closing down 3.8% for the week.
US sharemarkets also strengthened on Friday, despite rising US-China trade tensions and April retail sales that were worse than expected. The Trump Administration moved to block global chip supplies to blacklisted telecommunications equipment company Huawei Technologies, while Apple (-0.6%), Boeing (-2.1%) and Qualcomm (-5.1%) all fell after being mentioned as possible companies affected by Chinese retaliation. By the close of trade, the Dow Jones gained 0.3%, the S&P 500 lifted 0.4% and the NASDAQ added 0.8%.
The Price to Earnings (PE) ratio is one piece of data used to determine the relative value of a company or an index.
The S&P 500 index has often been regarded as fair value when it is trading at 15. In a low interest rate environment, you may stretch that to 17, but anything above that is considered overvalued or expensive.
The key to calculating the PE ratio is the ‘E’. While last year’s earnings are known, accurately forecasting next year’s earnings is crucial to determining fair value.
Before the outbreak of COVID-19, the PE of the S&P 500 index was 19 and that waved the red flag to us. It’s inconceivable to now think, in the midst of the global pandemic, with earnings slashed and most companies not prepared to even provide guidance on future earnings, that the PE is 23.
That is effectively using pre-COVID earnings estimates in the PE calculation. Even if those earnings were accurate, at 23 the PE is already overvalued over 30% assuming 17 is reasonable. The market is obviously putting a lot of faith and money into the US Federal Reserve coming to the rescue again.
It could get messy if that doesn’t work!
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