Friday, August 4, 2017

August 2017 Market Update - Bull Trade Hits New Highs

The S&P 500 July index added 1.93% (2.06% with dividends) in July, and posted a double-digit gain of 10.34% YTD (11.59% with dividends). The S&P 500 returned 13.65% gain for the one-year period (with a 16.04% total return with dividends). From the U.S. election on Nov. 8, 2016, the index was up 15.46% and up 17.15% with dividends. It was a month of new closing highs, the S&P 500 posted five new closing highs in July. All 11 sectors gained for the month, up from five last month and seven in May. Large cap stocks continued to outperform mid and small cap stocks in 2017. Let's review price, sentiment, and valuation as we start the month of August.

Price
Source: DSHORT Blog, Moving Averages: July Month-End Update

As Jill Mislinski writes on the moving average blog post: "All three S&P 500 MAs are signaling "invested" and four of the five Ivy Portfolio ETFs — Vanguard Total Stock Market ETF (VTI), Vanguard FTSE All-World ex-US ETF (VEU), iShares Barclays 7-10 Year Treasury (IEF), and Vanguard REIT Index ETF (VNQ) — are signaling "invested". In the table, monthly closes that are within 2% of a signal are highlighted in yellow."

Sentiment
Source: CNN Money Fear & Greed Index

After briefly reading "Extreme Greed" near the end of July, the CNN Money Fear & Greed Index started August in the "Greed" camp. This marked a change from mostly neutral readings we've seen over the last few months. Let's watch this indicator during the month to see if a seasonally weak month for the market swings the reading back to neutral or potentially into fear readings.

Valuation
Source: Bloomberg

According to a Bloomberg article by Oliver Renick and Liz McCormick titled Greenspan Sees No Stock Excess, Warns of Bond Market Bubble published July 31, 2017 and updated on August 1, 2017, Fed Model justifies stock valuations for now. They wrote, "Right now, the [FED] model shows U.S. stocks at one of the most compelling levels ever relative to bonds. Using Greenspan’s reference of 10-year inflation-adjusted bond yields, currently around 0.47 percent, the gap with the S&P 500’s earnings yield at around 4.7 percent, is 21 percent higher than the 20-year average. That justifies records in major equity benchmarks and P/E ratios near the highest since the financial crisis."

“The real problem is that when the bond-market bubble collapses, long-term interest rates will rise,” Greenspan said. “We are moving into a different phase of the economy -- to a stagflation not seen since the 1970s. That is not good for asset prices.” Anyone who followed the Federal Reserve under Greenspan's tenure knows that it had a spotty record of identifying bubbles.

Summary
Overall, price action continues to be positive for stocks. Sentiment readings may have peaked in July, and indicate we should be a bit cautious as we start August. Valuation remains on the high side unless you base your valuation assessment on the Fed Model. The streak of 402 calendar days without a 5% pullback in the S&P 500 is the seventh longest in history, according to Bespoke Investment Group. LPL released this chart (seen below) which further illustrates how long the S&P 500 has gone without a 5% correction. Notice that instead of 402 calendar days they highlight how many trading days the S&P 500 has had without a 5% correction, 261 as of July 11, 2017. The longest streak for the S&P 500 is 394 trading days from 12/21/1994 to 07/12/1996. Here's the chart (click to enlarge):
Let's end this monthly update with comments from Howard Marks, co-chairman of Oaktree Capital. He wrote in his investor memo Wednesday July 26, 2017: "Given my view of the environment, the only reason to be aggressive today is because defensive investing implies low prospective returns. But the question is whether pursuing high expected returns through aggressiveness can be counted on to be rewarded. If the answer is no, as I believe, then this is a time for caution."

As always, wise investing my friends.

Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.

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