Hey everyone, as we returned from a long holiday weekend we’ve see Volatility come back into play. Get my take on the current markets in this week’s round-up;
Market Sound Bites;
• Stocks continued to pull back from recent highs in a shortened trading week. The tech-heavy Nasdaq Index fared worst ending week in correction territory or down more than 10% from the all-time highs on Sept 2nd…Tech shares were also among the weakest within the S&P 500 Index, while energy stocks suffered as domestic oil prices sank below USD 40 per barrel for the first time since July…in addition, stocks in Europe rose on the continuing economic recovery, shaking off disappointment that the European Central Bank (ECB) did not announce additional stimulus, as well as renewed fears of a hard Brexit…
• During the US market rally off the Mar 23rd lows the five biggest U.S. companies (AAPL, AMZN, GOOGL, FB, MSFT) have seen their valuations climb to over 30x earnings…The spread between these five companies’ valuations, and the remaining companies in the S&P 500’s valuations, is wide and getting wider…the last time the spread between the biggest companies’ valuations and the remaining S&P 500 companies’ valuations were this wide was in 2018. A major market correction that year narrowed the gap quickly.
• Another indicator is how the total market cap of the S&P 500 compares to GDP of the United States. Before 2009, it was common to say that anytime the market cap of the S&P 500 exceeded the GDP of the United States, stocks were approaching overvalued. Today, the market value of U.S. companies currently stands at some $35+ trillion, while Q2 2020 GDP of the United States was $19.4 trillion… Historically, a forward P/E of 23x or 25x on the S&P 500 has been rightly viewed as expensive. In the current environment and with the current interest rate outlook, however, it seems more likely to me that sustained higher valuations are possible. If the S&P 500 were to trade at 25x 2021 earnings of, say, $160 a share, that would imply an S&P 500 at 4,000. Given that we know interest rates are set to remain ‘lower for longer,’ this outcome does not seem as farfetched as it has been historically.
• Yield’s on the US 10-year Treasury note ended modestly lower for the week while the balance sheets of global central banks are growing at a 33% year-over-year pace…Here in the U.S. the Fed’s measure of money supply (M2) is growing at a 23% year-over-year pace…When it comes to the flow of capital, low interest rates tend to nudge investors into stocks, which is especially true in the current environment. Since the yield on the S&P 500 is materially higher than the risk-free yield on U.S. Treasuries, investors have been increasingly moving further out onto the risk curve to own stocks and capture yield.
• Tensions flared as the UK and European Union (EU) began a new round of talks to flesh out their post-Brexit relationship. The UK published a draft law to create an internal market after December 31, but some elements overwrote sections of the withdrawal accord that the two sides agreed to last year. The UK government conceded that some clauses would breach international law, prompting the European Commission to threaten legal action and to advise member states to prepare for a no-deal Brexit…
Enjoy this Week’s Round-Up
Don’t Be A Rat Brain Trader – Be the Red Stripe Zebra !!
Trade Smart !
hpb
