September got off to a rocky start yesterday as the Dow
Jones Industrial Average lost 2%, stoking fears concerning
what has historically been the worst month in the calendar
for stocks. But just how bad could things get this year?
A short market history lesson
Using price data from Dow Jones going back to May 1896,
I verified that September is indeed the worst month for the
Dow on the basis of average returns. At (1.2%), it is one of
only two months that can't boast a positive average return
(the other is February, with a much smaller 0.2% loss).
September also hosted the worst monthly performance for the
Dow in history: a loss of nearly 31% in 1931.
That was then, what about now?
What can we expect this year? A month's time horizon is
far too short to even begin making a serious prediction.
However, according to data compiled by Professor Robert
Shiller of Yale, the broader S&P 500 index is valued at
nearly 18 times its cyclically-adjusted earnings (average
inflation-adjusted earnings over the prior 10 years). That is
a premium to the multiple's long-term historical average of
16.3, so a correction of 10% to 20%
wouldn't be highly surprisingin this environment.
The good news
The outlook isn't uniformly somber, though: By my
calculations, every one of the Dow components is currently
changing hands at a cyclically-adjusted P/E multiple below
that of the S&P 500. This includes superb businesses such
as:
Company
Cyclically-Adjusted P/E Multiple*
Caterpillar (NYSE: CAT)
7.6
Exxon Mobil (NYSE: XOM)
8.1
Walt Disney (NYSE: DIS)
10.9
JPMorgan Chase (NYSE: JPM)
11.7
United Technologies (NYSE: UTX) Continued... |