A lot has been made of the S&P at 2000. Given the broadly unchanged price this week, undoubtedly some technicians will interpret that as weakening momentum. However, I’d argue that the reason price momentum has stalled here is not due to the 2000 price level per se, but rather due to the PE level, which as the chart below shows, is now essentially back to the highest level in over a decade:
The monthly BAML surveys have consistently shown that valuation concerns have been widespread. So we probably shouldn’t be surprised that some people are taking some chips off the table here.
But as I’ve been expounding for a long time now, the macro backdrop today is fully consistent with higher present value of all financial assets. I’ve written in the past that I think the 30y should settle around 3.0% – a view which the market seems to moving towards. (See my mid year outlook on 6/19 and commentary on 5/2, 4/11, etc) Now recall that the last time S&P valuations were here, the 30y yields were 5.2% and 4.8%, respectively. So in the spectrum of liquid, long duration investable assets, bond prices are about 65% more expensive than in the last cycle, but equity prices are about unchanged relative to future cash flows.
So my expectation is that the S&P may hover here for some period of time. But as long as the economy continues growing, everyday savings are being generated, and every day, people & corporations are buying shares. So it is really a matter of time before current resistance levels on the valuation charts are breached. Once that happens, we may well see a strong flood of money into equities, as more and more people finally give up and invest despite their misplaced concerned about valuation.
Finally, note that seasonally, next month is the low before the very strong 3rd presidential election year cycle starts. Historically, the S&P has returned an average of 2.8% per month from Sept to April going into the 3rd presidential year.
And here are the last several instances:
- Chicago PMI jumped to 64.3 in Aug vs 56.7 exp and 52.6 prev
- UMichigan Consumer Sentiment was revised up to 82.5 vs 80 exp 79.2 initially
- US Core PCE was stable at 1.6% YoY as exp
- EU CPI declined to 0.3% as exp vs 0.4% prev. However, the Core measure ticked higher to 0.9% vs 0.8% exp and prev
- EU Unemployment was flat at 11.5% as exp
- UK GfK Consumer Confidence improved to +1 vs -1 exp and -2 prev
- Canada 2Q GDP improved to 3.1% vs 2.7% exp. However, the 1Q print was revised down to 0.9% from 1.2%
- Japan Unemployment ticked up to 3.8% vs 3.7% exp and prev
- Japan CPI was flat at 3.3% as exp. Stripping out the tax hike, +1.3% y/y.
- New Zealand ANZ Business Confidence declined to 24.4 vs 39.7 prev
- UK’s Terror Threat level was raised today
- Mon: US holiday, AU Mfg PMI, Japan CapEx, China PMI, Japan PMI, EU PMI, Australia BoP, Building Approvals
- Tue: RBA, EU PPI, US Markit PMI, ISM, Australia GDP, Japan Services PMI
- Wed: EU Services PMI, 2Q GDP, BoC, NZ House Prices, AU Trade Balance, Retail Sales
- Thu: BoE, ECB, ADP Employment, US Jobless Claims, Services PMI, ISM Non-Mfg
- Fri: EU GDP, US Employment Canada Employment