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There are a few ways to try explaining the stock market's relatively modest negative response to the irredeemably poor monthly employment report of Friday morning.
For sure, the S&P 500 did suffer a 1.5% reflex drop shortly after the deflating jobs data, but the damage was steadily mitigated in the afternoon with an upward drift to halve that loss, leaving the index above the prior Friday's level, which itself came after a 5.6% weekly gain.
So, why might investors have remained this unperturbed as the recovery, at least for a month, reverted to a "jobless" one?
Maybe they're whistling past the graveyard? This is doubtful given how fragile investor psychology remains, especially on matters of threats to growth. Yet it's possible that after a nifty little market rally as the economic news got much "less bad," it will take more than one lousy number to upset the tentative state of relief that's lately taken hold.
Or are we back to construing bad news as good, because that means Fed Chairman Bernanke is coming to the rescue? Well, the chatter about the likelihood of a QE3 asset-purchase program by the Fed did rise predictably after the data hit. Yet, at this point and these index levels, wishing for a QE3 is like having your cat stuck in a tree and hoping the house catches fire so the fire department comes to rescue the feline. Stocks will suffer plenty under the circumstances that would pressure the Fed to act, before the central bank would get to that point.
It could simply be that the sturdiness of the latest rebound has offered enough encouragement to enough investors that the market had discounted a slowdown, especially with what should be another respectable earnings-reporting season about to arrive. Most stocks have taken part in the rally, and such bellwethers as the Dow Jones Transportation Average and the S&P Mid-Cap 400 reached new highs, implying stocks are well underpinned for now.
With those earnings coming, the question is whether the market has already paid for good results in returning to the upper end of its 2011 range. That's another way of asking how stocks are valued here. The answer probably is fairly at best, and thus the market has at least put a generous down payment on imminent earnings.
Sure, the S&P 500 multiple on the next 12 months' forecast earnings is below 13, thus seemingly cheap. Yet the biggest 30 mega-cap stocks are so inexpensive and scorned that the other 470 together trade right at their long-term average, notes Morgan Stanley strategist Adam Parker. And Ned Davis Research notes that the median stock has a trailing multiple above 18, above the 42-year median and "neutral at best."
Valuation is not itself the reason to stick with this not-so-young bull market. But with money free, corporate deal-making percolating and investors far from the worrisome greed phase toward stocks, it would take a string of poor economic releases to cut through the calluses built up in this year's market tug-of-war.
PERHAPS NO STOCK BETTER EMBODIES the cheapness and orphaned status of mega-cap equities than Wal-Mart Stores (ticker: WMT). The $185 billion market-value retailing colossus is barely on the watch list of most benchmark-hunting institutional investors. Its largest holders are the index-fund managers and, reassuringly, Berkshire Hathaway (BRKA, BRKB).
One hedge-fund manager points out that Wall Street is selling the company back to the Walton family. As Wal-Mart has bought back shares at a brisk $15 billion annual clip, the Waltons' ownership is back above 48% and growing every day. Grant's Interest Rate Observer, always keen for contrarian value plays, notes somewhat facetiously that at the current buyback rate, in 15 years there will be one share outstanding.
But, almost no one cares, mostly because same-store sales at domestic locations (which represent about half of the 9,200 global outlets) have been stagnant. Wal-Mart stock, now at 54.08, is up more than 10% from where it sat one year ago, when Barron's Sandy Ward featured the company favorably ("Load Up the Shopping Cart!," July 12, 2010), even before counting the then-2.5% dividend yield, which is now 2.7%. Still, earnings growth and buybacks have meant the stock is at a similar valuation, about 12 times current-year earnings.
Family Dollar Stores (FDO) has a nearly identical share price to Wal-Mart's, and in the past four quarters Wal-Mart has earned $4.21 to Family Dollar's $3.03. Forecast profit growth differentials don't nearly account for the valuation gap. It's ironic that in a market eager to buy overseas growth, Wal-Mart, with all of its growth occurring outside the U.S., is given little credit.
Comments? E-mail: michael.santoli@barrons.com
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