July Market Update: Climbing a Wall of Worry

The S&P 500 gained 6.89% in June. YTD for the first half of 2019 the S&P 500 is up 17.35% (Note: YTD increase was 17.51% at the end of April). June market returns played out like the opposite of the December 2018 market. In the last week of November 2018, the S&P 500 had an incredible rally pushing the Ivy Portfolio signal to "invested" as we started December. I suggested investors not take the bait and stay in "cash." December returns declined until our current rally started after Christmas Eve market lows. Contrast that time period with the May to June period. At the end of May stocks declined on news of new tariffs potentially being placed on Mexican imports. This drove the Ivy Portfolio signal to "cash" on the last trading day of May, setting investors up for the opposite of the scenario that happened in the November-December timeframe of 2018. As soon as Trump indicated that Mexico had complied with his administrations' requests for help monitoring the flow of migrants the tariff threat stopped. This news sent stocks higher, helping investors ride the bullish stock wave a bit longer. Let's examine price, sentiment and valuation as we start July.

Price

Source: dshort blog, Moving Averages: June Month-End Update

Jill Mislinksi writes the following at the dshort blog:

All three S&P 500 MAs are signaling "invested" and four of five Ivy Portfolio ETFs — Vanguard Total Stock Market ETF (VTI), Vanguard REIT Index ETF (VNQ), Vanguard FTSE All-World ETF (VEU), and iShares Barclay 7-10 Year Treasury (IEF) — are signaling "invested".

Both U.S. and foreign stocks switched from "cash" to "invested" at the end of June. Will investors find themselves whipsawed again at the end of July? REITs have signaled "invested" since the end of January this year and treasury bonds have signaled "invested" since the end of November 2018. Commodities have signaled "cash" since the end of October 2018. As I've mentioned for the last few months, watch the WTI crude chart for signs of weakness or strength in the economy. WTI price peak for 2019 remains April 23 at $66.30 ($US/bbl).

Sentiment

Source: CNN Business Fear & Greed Index

After the reprieve of tariffs on imports from Mexico, investor sentiment sprung from "Extreme Fear" to "Neutral" at the start of July. What impact will Jay Powell and the U.S. Federal Reserve have on this index during July? Last month I noted that the CBOE Volatility Index (VIX) remained relatively calm. The VIX declined sharply at the end of June and beginning of July, this could be sending investors a signal that the major U.S. stock indexes have more upside. Will stocks continue to rally in July or will macroeconomic risks and the Federal Reserve actions spur traders and investors into selling positions? I'll give our last word on sentiment to the folks at the Leuthold Group who wrote a post MTI: Consumer Confidence Worrisome "Inverson" on June 18:

A less-publicized, but still worrisome “inversion” occurring beyond the Treasury market is that of Consumer Confidence, in which the Conference Board’s Present Situation Index has soared almost 70 points above the Expectations Index. This gap always becomes extreme in the late stages of an economic expansion, and today’s reading surpasses those recorded at all business cycle peaks other than February 2001.

Valuation
Three charts to enjoy this month. Let's start with reviewing the yield curve and current bond market inversions using a chart published by Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc. on June 20, 2019 in her commentary U.S. Stocks/Market Mid-Year Outlook: Battle Symphony. Clearly this shows our U.S. economy is late in the economic cycle.

Please click on chart to enlarge
Source: Schwab

Our next chart comes courtesy of Fidelity.  They recently highlighted the returns of expensive stocks, Russell 1000 stocks valued at more than 10 times revenue in green, versus the Russell 1000 index in blue. Expensive stocks have significantly outperformed over the last ten years. Note, however, that since 1990 expensive stocks have underperformed.

Please click on chart to enlarge
Source: Fidelity Investments

Our final word on valuations this month goes to Mark Hulbert who wrote Opinion: Stock bulls are telling themselves a lot of lies about this market for MarketWatch on June 4, 2019.

Please click on chart to enlarge
Source: MarketWatch

 He sums up the above chart with the following:

Notice that the market at that high was more overvalued than it was at anywhere between 86% and 100% of past bull market peaks (depending on which valuation measure used). The overwhelming message: Don’t look to valuations to cushion any decline.

This doesn’t mean that a bear market began at its late-April peak, of course. The stock market has been overvalued for a number of years now and, for the most part, has continued to produce impressive returns. What the valuation measures do mean is this: You’re on shaky ground if you have been giving the bull market the benefit of the doubt because of its allegedly reasonably valuation. You either need to find some other reason to be bullish, or to reduce your bullishness.

Summary
Charlie Bello twitted the following on July 5th and I think it sums up this month well:

Wall Street Week...
S&P 500: All-Time High 👏
Dow: All-Time High 👏
Nasdaq 100: All-Time High 👏
US Bonds: All-Time High 👏 (based on ETF: AGG)
US Jobs: 105 straight months of gains, longest run in history 👏
US Economy: longest expansion ever at month-end 👏
Fed: Cutting Rates on July 31st ⚡🔥⛽

How much longer can major U.S. stock participants keep climbing the proverbial wall of worry? Does the stock market have one last burst of energy in it for this cycle moving investors to a euphoric peak? As we begin July four of the five asset classes from the Ivy Portfolio system signal "invested"; sentiment is rising off of the low it made in May; and valuation remains elevated. As we move into the second half of 2019, more sovereign debt is trading at negative yields. This forces investors to look for alternatives stores of value and return. Recent rallies in stocks, gold, real estate, even the burgeoning world of crypto-assets show that central banks actions significantly impact investor behavior. Let's end with this quote from Benjamin Graham, a famous value investor and mentor to Warren Buffet:

The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.

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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Here's what I've been reading, listening to, and watching recently:

• Bill Gates Interview at the Economic Club of Washington D.C. (YouTube)
• Another Last Goodbye: U.S. Stocks’ Roller Coaster 18 Months (Schwab)
• Cass Freight Index® Report (Case Information Systems)
• This Time It's Different (Howard Marks Memo)
• Chuck Akre – The Three-Legged Stool – (Invest Like the Best, EP.135)
• 'The recession has already started': David Rosenberg on the U.S. economy (BNN Blomberg via YouTube)