October Market Update - A Sluggish Economy Where We Trade for Free

The S&P 500 gained 1.72% in September, ending at 2,976.73. The sugar high from the world's two largest economies (USA and China) is over and unfortunately the sugar store is closed. What do I mean? China's stimulus to help pull the global economy out of a slowdown from the 2015-16 dip cannot be replicated. It looks probable the U.S. used up it's last bit of fiscal stimulus before election day with the Tax Cuts and Jobs Act of 2017. Our current economic landscape shows Europe learning about the downside of negative rates and a banking system that has not healed from the Great Recession, Japan's central bank left with no impactful stimulus, aging demographics, underfunded pensions, Brexit, a corporate debt fiasco-in-the-making, and a developed world running out of labor. With this backdrop, at best, the U.S. sees a choppy directionless market until the election. Let's jump right into the details and review price, sentiment and valuation.

Price

Source: dshort blog, Moving Averages: September 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. VEU almost switched to "cash" during August. Currently VEU appears to be the most vulnerable asset class to switching position. REITs have signaled "invested" since the end of January 2019 and treasury bonds have signaled "invested" since the end of November 2018. Commodities have signaled "cash" since the end of October 2018.

Sentiment

Source: CNN Business Fear & Greed Index

The CNN Fear & Greed Index started the month of October at "Neutral." In the first week of October it has dropped back into "Fear" and may hit "Extreme Fear" before the month is over if third quarter earnings slow even more than the market is anticipating. Switching to the CBOE Volatility Index (VIX), it remains elevated with a reading over 15. It wouldn't surprise me to see the VIX intermittently rise between now and the end of the year as slowing year-over-year Q3 economic data is reported and processed by market participants.

Valuation

Please click on image above to enlarge
Source: multpl.com

The price to sales ratio, 2.17, for S&P 500 is close to the highs, 2.2, reached in September 2018. This reinforces, yet again, that the U.S. stock market is expensive and we have full valuations going into third quarter earnings season. As Keith McCullough, CEO of Hedgeye Risk Management, likes to say, "Valuation is not a catalyst for the stock market."  Examining valuation data over decade periods of time, one point becomes clear: "Buy stocks when they’re cheap and you’d likely end up with a good outcome; buy them when they’re pricey, and you’d have poor odds of turning in a profit."

Summary
Equities remain in a positive trend and four out of five asset classes in the Ivy Portfolio signal invested at the beginning of October. Sentiment started the month at "Neutral" and quickly turned to "Fear." Valuation remains elevated for U.S. stocks. The unemployment report, specifically the unemployment rate dropping to 3.5%, shows investors a recession in the U.S. economy has been delayed according to the Sahm Rule recession indicator.  Note that I've added a link to this in the links section of the Captain Retirement Blog site. Let's end with a quote from Nolan Bushnell, Creator of Atari:

"I try very hard not to live life in the rearview mirror. What's more interesting to me is what I'm working on now."

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.