September 2017 Market Update - Risk Spike Ahead

The S&P 500 was up 0.05% in August. When we examine global securities via the Morgan Stanley Capital International All Country World Index (MSCI ACWI, iShares ETF ACWI), which represents 85% of the global investable equity market, it has been up 10 months in a row. The question on most investors' minds is whether or not the strength of stocks can continue. With that background, let's review price, sentiment and valuation as we start September.


Price
At the end of August the S&P 500 was trading above the 10-month simple moving average, the 12-month simple moving average and the 10-month exponential moving average. According to the Ivy Portfolio timing model this trading position means that an investor should be "invested." The Ivy Portfolio follows five exchange traded funds (ETFs) and as of the close of August 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." The ETF DBC, representing commodities, is the fifth Ivy Portfolio ETF and the only one barely below its 10-month and 12-month simple moving averages, signaling to stay in cash. Jill Mislinski writes for the Doug Short blog and updates the price model monthly. The results of the analysis remain until the close of the next trading month.

Sentiment

Source:CNN Money Fear and Greed Index

Sentiment data fluctuated wildly during the month of August. As we discussed in last month's market update, fear presented itself in the market during this seasonally weak month. The CNN Money Fear and Greed Index dipped below 20 for the first time in 2017. A low reading typically happens when volatility in the market is rising. In August, it revealed investors were briefly feeling more fearful of investing. The beginning of September finds this indicator back at "neutral" with a reading of 50.

Valuation
I'd like to reference a bit of writing from Bill Miller's July 18 article titled: "Well this is a bull market you know." Here is his assessment from that time and I believe it remains true today:

"The market’s price/earnings ratio is moderately elevated versus its long-term average, but that average includes the very low p/e ratio of the high-inflation 1970s, which brings the averages down. More importantly, all asset classes compete with each other for investors’ money, so looking at p/e ratios in isolation is incomplete if one wants to draw any reasonable conclusion about valuation. Neither cash nor bonds offer any serious competition to stocks at present levels. I think yields on the 10-year would have to be north of 4% before they do, which would imply short rates above 2%, levels the market thinks are years away.

Jesse Livermore used to note that stock prices follow what he called “the path of least resistance” and that investors should always trade in line with the path of least resistance. Since March of 2009 that path has been higher, and it looks to remain so."

As we've discussed valuation remains elevated. This has implications for long-term investment results, but has minimal impact on short-term direction of markets. Expensive markets frequently become more expensive. Furthermore, as Bill Miller points out, until there is an alternative asset class that looks more attractive than stocks, the valuation of the market may continue to rise. Please review the P/E10, which is the most sited example of the overvalued market:

Source: D Short Blog at Advisor Perspectives

Summary
September starts with the price action telling us to be invested in multiple asset classes. Sentiment begins the month neutral. Valuation remains elevated. With that backdrop we enter the seasonally weak month of September. Please click on the infographic below from LPL Financial to learn more about September market performance. When you view this remember August was up and the market is above it's 200-day moving average.

During September, we'll learn what the creative teams at Apple have in mind for the iPhone 8 -- anticipated to be released September 12. Apple is the largest US company by market capitalization. Mid-month, September 19-20th the Federal Reserve meets to discuss monetary policy. At the end of the month or first couple weeks of October, we'll know if the US debt ceiling has been raised. Congress also is due to pass a spending bill to fund the government for the next fiscal year. If that wasn't enough uncertainty to add to the market, we also have increasing geopolitical risk with the North Korea situation. Additionally, we'll continue dealing with the hurricane season and the heartbreaking situation in Houston. Lastly, reversing DACA could lead to more social unrest. Folks, this is only what we know is going to happen in September. I'm calling this a risk spike for September and October. Hopefully, we'll find each other again in November pleasantly surprised that the market and economy are still chugging along enjoying 3%+ GDP growth and subdued inflation. My fear is that market momentum changes and the correction everyone has been anticipating is sharper than expected. Fortunately, at present, US corporate earnings have been growing very steadily for the first two quarters of the year and there are no current indicators flashing an eminent US recession.

Let's end with this quote from Lee Iacocca, the former auto executive:

"One of the most important lessons I learned in business was that if all you're getting from your team is a single point of view -- usually your point of view -- you've got to worry. You can get your own point of view for free."

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.