Every Friday I recap “news you can use” from the week: a handful of quotes from major (and often expensive) news sources, so you can stay up to date on the news that affects your money without spending a dime and in less than a minute.
Here are headlines and quotes from select money stories this week. Then you’ll find my take on the week.
Market’s 2022 Slide Has Already Changed Investor Behavior (May 8, The Wall Street Journal):
The S&P 500 traded last week at 17.7 times its projected earnings over the next 12 months, according to FactSet, above its 10-year average of 17.1 times earnings. With the Fed poised to continue tightening monetary conditions, many investors say stocks still don’t look cheap.
A Deposit Rate Shopping Spree Might Be Kicking Off (May 9, The Wall Street Journal):
The Federal Reserve’s most recent move to raise rates is surely beginning to catch the attention of people who have money deposited in banks earning minuscule interest. …
It is still early in the rate cycle, but investors in banks, brokerages and asset managers should be watching weekly tracking figures, online savings rates and even window stickers in bank branches very closely.
Investors haven’t begun to price in recession: Here’s how far the S&P 500 could fall (May 10, MarketWatch):
The U.S. stock market has tumbled this year amid fears over high inflation, rising interest rates, the Russia-Ukraine war, China’s COVID-19 lockdowns and a slowing economy.
“If we do actually get a typical economic downturn, then the S&P should trade for right around 3,000,” according to [DataTrek co-founder Nicholas] Colas.
The rate of inflation over the past year slowed to 8.3% from 8.5% — the first time it’s declined since last summer. The March reading was the highest since 1981.
Yet the so-called core rate of inflation, which omits food and energy, rose by a stronger 0.6%. Wall Street had forecast a 0.4% increase.
The producer price index [PPI], which tracks how much manufacturers get for products at their initial sale, rose 0.5% on the month and 11% from a year ago, a decrease from the record 11.5% in March that was revised upward 0.3 percentage points.
Excluding food, energy and trade services, core PPI rose 0.6% in April and 6.9% from a year ago, the latter a decline from 7.1% last month.
Both monthly increases were exactly in line with Dow Jones estimates.
China’s Economic Slowdown Is Rippling All Around the World (May 12, The Wall Street Journal):
For decades, the world has depended on China as a massive factory floor and market. As the country’s economic growth crumbles, the pain is spreading globally. …
Exports are weakening in Asia as China’s neighbors watch their largest market sag. Companies including Apple Inc. and General Electric Co. warned investors about production and delivery problems stemming from China’s troubles, as well as dwindling sales.
My take on the week
What a horrible market.
In just the first four days of this week, the tech-heavy Nasdaq composite stock index was down 7%. And for the year thus far, the decline is closing in on 30%.
Not a great time to be a stock investor. Or is it?
Ever hear the expression, “When the going gets tough, the tough go shopping”?
Years ago, I wrote an article called “The 10 Golden Rules of Becoming a Millionaire.” Here’s rule No. 3:
3. Buy when everyone’s freaking out, and sell when everyone thinks they can’t lose
Rich people ring the register when the economy is booming, but that’s not when they created their wealth.
You get richer by investing when nobody else will: when unemployment is high, the market is tanking, everybody’s freaking out, and there’s nothing but fear and misery on the horizon.
The cyclical nature of our economy all but ensures bad times will periodically occur, and human nature all but ensures that when bad times happen, most people will freeze like a deer in the headlights. But downturns are the time you’ve been saving for.
If you think the world is truly ending, buy canned food and a shotgun. If not, step up. As billionaire investor Warren Buffett famously advised, “Be fearful when others are greedy and greedy when others are fearful.”
See where I’m going here?
I’m not suggesting you go out and start investing today. I still think stocks have further to fall. But there’s a liquidation sale happening on Wall Street, so it’s time to at least make a shopping list. As I explained last week, the stock market will start going up before the economy does. Let’s be prepared.
I started my list yesterday. Here’s a copy:
Now, let’s discuss.
You’ll see I have two sections. The first is for stocks I’d like to own. The other is for stocks I already own that I’d like to add to.
As you can see, I recorded the date I came up with the idea, the name of the company, the stock symbol, the price at the time it went on the list and the price/earnings ratio (P/E), which is the price of one share of a stock divided by the company’s earnings per share for a 12-month period: more on that in a minute. (Note that some of these stocks have a negative price/earnings ratio. That’s because they’re losing money.)
You’ll also note that I used the term “Forward P/E” on my list. Price/Earnings ratios are typically based on a stock’s trailing 12 months of earnings. The forward P/E is the stock price divided by the estimated earnings for the year ahead. Since that tells me more about the future, I prefer “forward” but either method works.
The company names are linked to current quotes, so I can click them anytime and see the current stock price, the current P/E and lots of other information. I used CNBC, but there are plenty of free sites for this type of information. Two others I frequently use are MSN and MarketWatch.
In the final column, I recorded how the current P/E compares to the historic P/E of the stock. Ideally, I’d like it to be on the low end.
Example: Netflix. When I added it to my list, Netflix was trading at $176 per share. By looking on CNBC, I saw that’s about 17 times its current annual earnings of $10.46 per share ($176/$10.46 = 16.8).
But how does that compare with Netflix’s P/E over the years? Knowing that will help me determine whether Netflix is cheap relative to itself.
To learn that, I went to another site, MacroTrends.net, where they list 10 years of P/Es, along with tons of other info, for thousands of stocks. There I saw that over the last decade or so, Netflix has typically traded for 50 to 100 times its earnings.
If Netflix was trading at 50 times its earnings today, it would be worth 50 x $10.46, which is $523! And, in fact, Netflix was going for $600 per share earlier this year.
Now you see why my note in the “Compared to Historic” column says Netflix is trading at a historically low P/E, signaling that it’s potentially a bargain.
That’s the beginning, not the end
Price/earnings ratios and historical P/E comparisons are one way to determine what and when to buy, but they’re the first chapter, not the whole book. Before I buy a stock, I’ll look at lots of other stuff — everything from research reports to what I read, hear and watch on the myriad investment sources I follow.
Take Netflix again. One reason Netflix is trading at $176 instead of $600 is because in their latest earnings report they disclosed that, for the first time in the company’s history, they lost, rather than gained, subscribers. This is huge. Because the reason Netflix, or any stock, has a high P/E is that it’s rapidly growing. When the growth stops, the P/E drops.
So, will I buy Netflix? I haven’t yet decided. This leads me to my final point: Just because I put a stock on my list doesn’t mean it’s going to stay there.
As I’m doing my daily reading and watching, I record every stock idea that remotely interests me. I’ll follow them, research them, then decide whether, and when, to buy. And if I do buy, it’s likely going to be a little at a time, since I’m nowhere near smart enough to pick the bottom.
Check out my podcast
I hope having these news notes makes your life easier. Want something else that’s concise and impactful? Check out my weekly “Money!” podcasts. They’re brief, casual conversations with news recaps, as well as tips and tricks to make you richer.
You can listen right here on the Money Talks News website, or download them wherever you get your podcasts. Just look for Money! with Stacy Johnson.
Check them out: You’ll be glad you did!
I founded Money Talks News in 1991. I’m a CPA, and I have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.