Price
Source: dshort blog, Moving Averages: January Month-End Update
With China representing 17% of the global economy, the massive efforts to contain the 2019-nCoV immediately slowed global markets. Particularly hard hit were commodities as investors tried to factor in slower growth and less demand for raw materials. After signaling "invested" last month --for the first time since October 2018-- the sell-off in DBC pushed the Ivy Portfolio signal back to "cash." Continue watching commodities and oil prices during February, any gains in oil will most likely indicate improvement in global economies, while further losses in oil should indicate the global economy is weakening and the dollar is rising. For a broader update, let's turn to Jill Mislinski, who wrote the following for 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 2019. REITs have signaled "invested" since the end of January 2019 and treasury bonds, IEF, have signaled "invested" since the end of November 2018.
Sentiment
Source: CNN Business Fear & Greed Index
The CNN Business Fear & Greed index started February at "Neutral." As of this writing, this index has bounced back to 58, indicating "Greed" in the market. Liz Ann Sonders, the Chief Investment Strategist at Charles Schwab & Co., wrote an article on January 27, 2020 titled Virus: Could it be the Catalyst to Change Sentiment? She explains:
The gains over the past year have been remarkable; not just for their magnitude, but also for their consistency. But the power of the momentum move brought with it very extended investor sentiment conditions. Sentiment can move into the extreme optimism zone and stay there; while being right for an extended period. It’s difficult to pinpoint the inflection point in advance.Valuation
Our modern financial system incorrectly promotes the idea that stocks are always an “investment,” regardless of the price. Eventually valuation matters, so does the rate of change of growth and inflation as it ebbs and flows over time through various economies that taken together constitute the global economy. If you're saving in IRA's and company sponsored retirement plans and your saving includes being "bullish on stocks", then you are hoping that Andrew Slimmon, senior portfolio manager at Morgan Stanley Management, is correct in his assessment of stocks vs. bonds from December of 2019. According to a recent MarketWatch article:
Its critical to take into account interest rates when valuing equities. The average dividend yield for S&P 500 stocks is at 2%, according to FactSet data, above the 10-year U.S. Treasury note yield of 1.87%. Typically, the S&P 500 dividend yield trades 20% below the 10-year yield, he said, suggesting that relative to interest rates, the stock market has more room to run.To contrast Andrew's assessment, we have Kevin C. Smith, CFA and Tavi Costa, from Crescat Capital, writing the Crescat Q4 2019 Quarterly Investor Letter, where they wrote the following:
"We certainly did not predict the Coronavirus, but it may prove to be the catalyst to tip this market that is trading at truly historic valuation levels after a record long US economic expansion. Median EV to sales for the S&P 500, based on our work recently reached an insane, euphoric level of 3.6 times, two times more than the tech bubble peak."MarketWatch's Shawn Langlois highlighted their work with his article published February 1, 2020: Do NOT buy the dip, warns investor who says a ‘brutal bear market’ looms. And to further illustrate the bearish case for stocks based on current valuations read the consistently mathematical work of John Hussman, Ph.D. in his February Market Comment: Whatever They’re Doing, It’s Not “Investment”.
Summary
Prices for four of the five asset classes tracked for the Ivy Portfolio signal "invested" for the month of February. The only asset class signaling "cash" is commodities. Sentiment, according to the CNN Business Fear & Greed Index, starts the month on the greedy side of neutral, coming down from "extreme greed" levels observed toward the end of 2019. Valuation remains elevated for U.S. stocks.
Thanks to Joshua Franklin and Kate Duguid at Reuters for writing The Decade of Debt: big deals, bigger risk. It's a must read for anyone investing in public U.S. companies. The tide has been rising for investors for over a decade, when will we find out who is swimming naked? It's going to be quite the show. Let's end with a couple of quotes from Peter Lynch, American Investor and former mutual fund manager:
"Although it's easy to forget sometimes, a share is not a lottery ticket. It's part ownership of a business."
"If you're lucky enough to have been rewarded in life to the degree that I have, there comes a point at which you have to decide whether to become a slave to your net worth by devoting the rest of your life to increasing it or to let what you've accumulated begin to serve you."
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.--------------------------------------------------
Here's what I've been reading, watching and listening to recently:
- Fed's first hurdle in 2020: Dispensing with 'QE Lite'(Reuters)
- Monetary Policy Space in a Recession: Some Simple Interest Rate Arithmetic (Fed Notes)
- Ranked: The World’s Most Downloaded Apps (Visual Capitalist)
- Top 10 Checkouts of All Time (NY Public Library)
- DoubleLine Round Table Prime 1-6-20 - YouTube Segments 1, 2 and 3
- White Paper: We’ll Live to 100 – How Can We Afford It? (World Economic Forum)
- A Decade of Urban Transformation, Seen From Above (NY Times)
- What science tells us about preventing dementia (WSJ via Fidelity)
- The Strength of Consumers Is Overstated (Bloomberg)
- Local Economies’ 2019 Slump Looks Likely to Continue, According to Yelp’s Economic Average (YEA)
- From Managing Decline to Building the Future (Economic Innovation Group)
- The Decade of Debt: big deals, bigger risk (Reuters)
