The following information was given to me just a few days ago by a Financial Advisor whom I have known for a longtime and trust their accuracy and comments. Hoping this may be useful to you.
A number of issues weighed on the equity markets yesterday, sending the Dow Jones Industrial Average (DJII) down 311.50 points (-2.26%) and the S&P 500 Index down 35.43 points, for a 2.33% loss for the day. The technology laden Nasdaq Composite dropped 48.83 points, or 1.84%.
In our view, continued concerns about the credit and mortgage markets, further deterioration in the housing market, and rising oil prices appeared to be the major drivers of yesterday's broad-based sell-off. Reports of potential large trading losses at a prominent German bank also likely diminished investors’ appetite for equities, in our opinion.
Market breadth was decidedly negative yesterday, with the number of declining issues outpacing the number of advancing issues by more than 15-to-one on the New York Stock Exchange. Yesterday's action marks the 29th 100 point move in the Dow thus far this year, fast approaching the total for 2006 of 33. The “VIX Index,” a commonly used measure of volatility, registered its highest reading since June of 2006 yesterday. Treasury markets, in a “flight-to-quality,” rallied yesterday driving the yield on the 10-year Treasury note below 4.8%.
Credit market fears continued to trouble investors yesterday in our opinion.
It appears the main source of concern is that increased risk aversion and more restrictive credit markets could have a dampening effect on M&A activity, making deals tougher to pull off. Two large leveraged buy-outs (LBOs) were put on hold yesterday, and there is concern that there will be fewer future deals due to financing difficulty, in our view. New home sales were lower than expected in June, falling 6.6% versus consensus expectations for a 2.7% decline. Weaker-than-expected second quarter earnings from a number of homebuilders further supported the view that any significant recovery in the housing market may be forestalled. Crude oil prices continued to rise yesterday, reaching just shy of $77 per barrel. In our view, recent uneasiness over a slowdown in consumer spending was magnified yesterday, given the negative housing data and higher crude prices.
We believe the recent equity market action could prove to be a buying opportunity for investors willing to look past the near-term volatility. Although credit concerns, the housing market, and a potential consumer slowdown are all risks that should not be ignored, we believe the market will ultimately be supported by a number of factors, including solid corporate balance sheets, relatively attractive market valuations, strong free cash flow generation, rising income levels, low unemployment, and moderating inflation. Although we expect markets to remain choppy, we believe the potential exists for further gains in the equity market by the end of the year and into 2008. Our year-end target for the S&P 500 is 1,600 and our year-end target for the Dow is 14,400. The S&P 500 currently trades at approximately 15.7x our 2007 and 14.6x our 2008 S&P 500 operating earnings (pre-writeoffs) forecasts of $94.75 and $101.75, respectively. Our mid-year 2008 targets for the S&P 500 and Dow Jones Industrial Average are 1,725 and 15,500, respectively. This implies approximately 14% upside from current levels over the next 12 months.
This information was provided by Smith Barney
JS - Financial Advisor.