Assessing the damage

Stock markets were recently sideswiped by the dual threat of a new Omicron strain of COVID-19 and Jerome Powell’s hawkish pivot. Global markets adopted a risk-on tone and the S&P 500 pulled back to test its 50-day moving average.     This week, I assess the damage that these developments have done to the investment...

Commodity weakness = Global slowdown?

My Trend Asset Allocation Model has performed well by beating a 60/40 benchmark on an out-of-sample basis in the last few years. The early version of the Trend Model relied exclusively on commodity prices for signals of global reflation and deflation. While the inputs have changed to include global equity prices, this nevertheless raises some...

Where are we in the market cycle?

Where are we in the market cycle? The accompanying chart shows a stylized market cycle and changes in sector leadership. Bear markets are characterized by the leadership of defensive sectors such as healthcare, consumer staples and utilities. Early-cycle markets are sparked by the monetary stimulus or the promise of monetary stimulus. The market leaders in...

Q3 earnings season preview

The recent pullback in the S&P 500 has deflated the forward P/E to 20.1 as of close last Thursday, which is in the bottom of the post-COVID Crash recovery range. The P/E derating is not surprising as bond yields have risen to put downward pressure on P/E ratios.     What's next? The upcoming Q3...

Will rising yields spook stocks?

Mid-week market update: Last week, the market was rattled by the prospect of an Evergrande default. This week, it's rising yields. Both the 5 and 10 year Treasury yields surged decisively this week and the 2s10s yield curve has steepened.     Are rising yields destined to spook stock prices?     Good news, bad...

A time for caution, or contrarian buy signal?

Recently, a number of major investment banks have published warnings for the US stock market. The strategists at BoA, Citigroup, Credit Suisse, Deutsche, Goldman Sachs, and Morgan Stanley have issued either bearish or cautionary outlooks.  On the other hand, Ryan Detrick at LPL Financial documented the effects of strong price momentum on stock prices. History...

The market risk hiding in plain sight

As the infrastructure and budget bills make their way through Congress, I was surprised to see that the latest BoA Global Fund Manager Survey did not mention a corporate tax increase as a key risk to the S&P 500.      The Biden tax proposals have been well telegraphed and most of the details have...

A range-bound August?

Preface: Explaining our market timing models  We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.   The Trend...

High expectations for earnings season

Mid-week market update: As the market enters into Q2 earnings season, FactSet reported that consensus estimates are calling for an astounding 63.3% YoY EPS growth.     While that growth estimate appears to be a high bar, investors have to keep in mind the low base effect. As well, the historical record shows that actual...

How to navigate the mid-cycle expansion

It's been over a year since the stock market bottom at the height of the Pandemic Panic. The market consensus has evolved from an early cycle recovery to a mid-cycle expansion, as evidenced by the BoA Global Fund Manager Survey.     What that means for investors? Here are the key questions we focus on:...

Boo! Powell scares the children!

Preface: Explaining our market timing models  We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.   The Trend...

China rides to the rescue?

The headlines from last week sounded dire. It began when China’s May economic activity report was disappointing, with industrial production, retail sales, and fixed-asset investment missing market expectations.      Then the Federal Reserve took an unexpected hawkish turn. The statement from the FOMC meeting acknowledged that downside risks from the pandemic were receding as vaccination...

The market’s instant FOMC report card

Mid-week market update: It's always difficult to make any kind of coherent market comment on FOMC meeting days. The market reaction can be wild and price moves can reverse themselves in the coming days.   Nevertheless, experienced investors understand that it's not the announcement that matters, but the tone announcement compared to market expectations. Bloomberg...

The bond market tempts FAIT

Remember when I called for a bond market rally (see What a bond market rally could mean for your investments). The 10-year Treasury yield broke support last week and shrugged off a hot CPI print. Is the bond market tempting FAIT, or the Fed's Flexible Average Inflation Targeting framework?     Here are some of...

Is the S&P 500 wildly overvalued?

Several readers asked me to address the valuation warning from Jason Goepfert of SentimenTrader, who found that the S&P 500 is wildly overvalued based on a combination of real earnings yield and dividend yield.     Let's begin by unpacking Goepfert's chart (annotations are mine). There were five instances since 1970 when the market appeared...

Do valuations matter anymore?

How expensive are US equities? Fed Governor Lael Brainard warned about "stretched valuations" in the preamble to the May 2021 Financial Stability Report:   Vulnerabilities associated with elevated risk appetite are rising. Valuations across a range of asset classes have continued to rise from levels that were already elevated late last year...The combination of stretched...