In Markets "In a Nutshell"

Markets “In a Nutshell” for August 21, 2023

Investment Week at a Glance

Stocks finished down for the week.  The Dow Jones Industrial Average fell 2.20%, the S&P 500 was down 2.10%, and the NASDAQ fell 2.60%. Foreign stocks (MSCI EAFE) were also down, falling 2.80%. Bond prices were down for the week, with the 10-year U.S. Treasury ending the week at 4.25%.  (Data source: Wall Street Journal)

What is Causing This Pullback

Stocks continue to move lower in the month of August as the NASDAQ has fallen over 7% to start the month of August. The Dow Jones now has a gain of only 4% for the year after the rough start to August. The excitement about inflation slowing and artificial intelligence is not gone but has been lowered as global growth concerns have grown recently. Interest rates are also back on the rise as the 10-year treasury yield is now at 4.25% and back to cycle highs. 30-year mortgage rates are now at their highest levels in 21 years which could slow the housing market as buyers are having a much higher monthly payment. While higher interest rates are a way to slow inflation, it also puts strain on businesses and the consumer as it costs more to buy goods and services on debt.

Q2 Earnings Season Coming to an End

Earnings season is coming to an end as earnings appear to be bottoming for companies as expected. Expectations show that after Q2 many companies will begin to see their earnings rise again after a decline. Revenues continued to rise and as cost pressures continue to subdue, profit margins are poised to increase in the coming quarters. Tech and growth led the way on the earnings front as they outperformed the broader market despite their stocks having a rough August. With earnings higher than expectations and a decline in the market, the valuation of the S&P 500 has come down from a 19.5 price-to-earnings ratio to 18.5. A lower P/E ratio gives markets more opportunity to rise as their valuations aren’t too stretched.



From 1981 to 2022, what has the average P/E ratio been of the S&P 500? (Scroll Down for Answer)

  1.     15
  2.     18
  3.     22
  4.     25




















































Answer below.



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3.     22.  The average P/E ratio has increased over the past 40 years, as from 1900 – 1980 the average was 13. The increase in the valuations is due to how much easier it is to grow now than 100 years ago as it is easier to buy and sell goods as well as acquire competitors and other companies.