Dental Tribune U.S. Edition

Avoiding the noise By David Keator, Partner Keator Group LLC Shortly after reviewing some econom- ic data from the first half of 2013, I had a meeting with a client. She started our meeting saying, “People say the market is going to crash.” I was a bit surprised. From an academic perspective, I’m see- ing many positive signs. I asked, “Who are ‘people’ and what exactly are they saying?” I didn’t get an answer. This exchange is indicative of many that we might have on a monthly basis with clients from all walks of life. Wheth- er a professional or retiree, it seems to matter little. There is still this impend- ing sense of dread, and it seems to be directed at the equity markets. Maybe it is residual from the Great Recession, or maybe it’s just the byproduct of the 24/7 financial news cycle. I wish I knew; however, just like you’re taught when first learning golf: You need to keep your head down, focus and drive the ball. Oth- er than that, everything else is a distrac- tion in that one moment in time. Let’s look at some of the current eco- nomic data. I always like to start with revenue and earnings, then put it in per- spective. You can’t have profits without revenue, and profits are what conceptu- ally drive a market higher. Operating earnings for the Standard & Poor’s 500 was $116.12 per share as of June 30. This is an increase of approximately 16 percent from the previous stock mar- ket highs in 2007. All this translates into a price/earnings ratio (stock value rela- tive to stock price) that moved from ap- proximately 15 times earnings to a valu- ation of 13.9 times earnings. Yes, even with the S&P 500 Index hitting fresh highs we are still trading almost 7 per- cent below 2007’s peak earnings valua- tion as well as approximately 7 percent below a 30-year price/earnings average. Furthermore, corporate profits are near 10 percent of the country’s GDP com- pared with the 50-year average of 6.2 percent. Let’s put this in perspective. Corporate revenues are strong, profits are at record levels, corporate debt is at 20-year lows, employment is recovering, and the ratio of earnings to stock price is signaling a discounted stock market valuation. Granted, “corrections” are a normal part of any market environment but from this point of view I’m not seeing “crash.” Maybe it’s just hyperbole and we under- stand that many people feel nervous. The question is: Where does this height- ened sensitivity to volatility come from? Taking into consideration the econ- omy as a whole might help further de- velop the picture. Seventy percent is the often-quoted statistic of what consumer spending represents in our economy. It is important when reviewing corporate revenue and profits to look at the health of the consumer because so much profit is a result of consumer spending that trickles through the economy. In looking at the consumer balance sheet in the aggregate, we see assets in- creasing from $82.1 trillion in the third quarter of 2007 to a current $83.7 tril- lion. This 2 percent, although not enor- mous, is significant in light of the $16 trillion worth of wealth destruction that took place between the third quarter of 2007 and the first quarter of 2009. Fur- thermore, the portion of the consumer’s income needed for debt-service has fallen from 14 percent to slightly more than 10 percent (a 28 percent decline), thus giving consumers more purchasing power. In a consumer-driven economy, this fact combined with slowly falling unemployment should be further cata- lyst for increased corporate revenue and profits. So, where is the downside? It is our be- lief that the average investor has more to fear from the fixed-income side of the market than the equity side of the market. The Federal Reserve Board is still being accommodative, and this has artificially inflated the price of govern- ment bonds and has had a similar ef- An analysis of the fundamentals suggests the economy may not be as bad as you think Dental Tribune U.S. Edition | November 2013A26 INduStry NEWS educate | inspire | connect April 30 - May 3, 2014 30th Annual AACD Scientific Session Visit www.AACDconference.com • Be part of a cosmetic dentistry evolution spanning 30 years • Tap your inner overachiever with AACD’s high-level, hands-on learning • Get social and re-energize in the Florida sunshine 30year of Makin Smile Ad