Price
Source: dshort blog, Moving Averages: February Month-End Update
As COVID-19 spread outside China, investors lost hope the virus would remain geographically contained. In early March, the following countries had over 1,000 confirmed COVID-19 cases: South Korea, Italy and Iran. Globally, over 85 countries have at least one confirmed case. The negative impact of this virus spreading globally, quickly impacted investors in multiple asset classes. Jill Mislinksi writes the following at the dshort blog:
All three S&P 500 MAs are signaling "cash" 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 PowerShares DB Commodity Index (DBC) — are signaling "cash".U.S. and foreign stocks signaled "invested" since the end of June 2019. REITs signaled "invested" since the end of January 2019. Commodities switched to "cash" from "invested" at the end of January 2020. Since the end of October 2018, commodities only signaled invested for one month, January 2020. How long will these asset classes signal "cash" for investors following the Ivy Portfolio system? The iShares 7-10 Year Treasury Bond ETF (IEF) has signaled "invested" since the end of November 2018. The rally in US Government bonds, that started in the Fall of 2018, has really accelerated in the last couple of weeks as the price of bonds rose dramatically while yields fell.
Sentiment
Source: CNN Business Fear & Greed Index
The CNN Business Fear & Greed index started March reading "Extreme Fear." We've had a tremendous change in market sentiment from the "Extreme Greed" measurements observed during the last few months of 2019. Switching to the CBOE Volatility Index (VIX), it has increased considerably during the end of February and first few days of March. As of this writing the VIX is 31.99. Keith McCullough, CEO of Hedgeye, recently explained to investors: if the VIX is equal to or above 31 and the economy is in QUAD 4 (growth & inflation slowing) and the High-Yield spread is wider than 500 basis points then investors need to avoid adding capital to the stock market.
Valuation
Please click on image to enlarge
Source: multpl.com
December 2019 was the highest daily average price to sales ratio for the S&P 500 since multple.com started graphing data around 2001. The max statistic, which you see in the illustration above, uses an average across the course of an entire month. Therefore, if the average across all of December yields results in a new max price to sales, then it will become the new max at the end of the month. This is significant because in December sentiment measured "Extreme Greed" right when prices paid were their highest in almost two decades.
The current price to sales ratio of 2.25 shows us that the "correction" in stocks has not made a dent in their overvaluation. Moreover, the supply and demand shocks from COVID-19 will probably --I'm going to make a bold guess here-- impair sales. Bottom line: S&P 500 remains overvalued. Buyers of stocks here have little justification for their purchases as an "investment" besides saying to themselves they continue to like stocks better than bonds. Of course, bond investors are having more fun so far in 2020.
Summary
March started with a pattern we last observed at the beginning of November 2018. Price action for four of the five Ivy Portfolio ETFs signaled "cash" with only IEF signaling "invested." Sentiment according to the CNN Business Fear & Greed Index indicates "Extreme Fear." Valuation remains elevated for the S&P 500 on a price to sales basis. As I wrote in the December 2019 update: "Data dependent investors are waiting to see margin compression start to negatively impact employment statistics, corporate bond markets and stock buyback activity." Unlike the growth slowdowns in 2011 and 2015, this current slowdown was preceded by a yield curve inversion and now the challenges posed by a possible pandemic. With limited and aggressive central bank tools left, I suspect many investors will start appreciating gold again in their portfolios.
Let's skip quotes this month and end this update with a review of three more data points in our current economic landscape.
I. Recent Rate Cuts
Please click on image to enlarge
Source: Crescat Capital
These are the last times the Federal Reserve and the Bank of Canada cut rates by at least 50bps in the same month: 3/2001, 9/2001, 10/2001, 11/2001, 03/2008, 10/2008 and 12/2008.
II. CEO Departures
Source: CNBC
On February 12, 2020, Maggie Fitzgerald at CNBC reported, "A total of 219 chief executive officers left their posts in January, the highest month on record, according to business and executive coaching firm Challenger, Gray & Christmas." From the firm's press release, "While Challenger cannot track every CEO who leaves a company, the numbers have been steadily trending upward since August 2018." This coincides with the peak in growth in the U.S. economy in Q3 2018.
III. RV Sales
According to the RV Industry Association, RV sales have declined for two years in a row. According to their data, two years in a row of negative percent change from the prior year in RV sales has only happened during the following periods: 2018-19, 2007-2010, 2000-2001, and 1989-1991.
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, listening to, and watching recently:
- What You Need to Know About the Corona Virus? (WaPo)
- The Coronavirus Goes Global (NY Times, The Daily)
- David Rosenberg: This turbocharged debt cycle will end miserably — it’s just a matter of when (Financial Post)
- The Federal Debt and Your Investments (Schwab)
- Investors Un-Cautiously Optimistic (Lyons Share)
- A New Index of the Business Cycle (MIT)
- Charlie Munger warns there are ‘lots of troubles coming’ because of ‘too much wretched excess’ (CNBC)
- The Silent Depression: Trundling Is the New Booming (CFA Institute)
- Powell’s Panic Cut. McCullough’s Response (Hedgeye via Youtube)
- Checkup for $30, Teeth Cleaning $25: Walmart Gets Into Health Care (Bloomberg)
- Comparative Relevance of Physical Fitness and Adiposity on Life Expectancy: A UK Biobank Observational Study (ScienceDirect.com)
- Column: With most drug ingredients coming from China, FDA says shortages have begun (LA Times)
- You’ve Been Washing Your Hands Wrong (NY Times)
- Rosenberg: Investors, let’s contain our bearishness - this too shall pass (Globe and Mail)
This post was published March 4 and updated March 6 to show the last time we were in a similar market to today was in the beginning of November 2018. A few of the differences between then and now are: 1) In 2020 compared to 2018, the Federal Reserve has pivoted to try to stimulate growth and inflation 2) In 2020, there's been a yield-curve inversion prior to this "correction" 3) The market started this "correction" from a more expensive starting place compared to November 2018 (looking at Price to Sales ratio) 4). In 2018 VNQ signaled "invested", this month it signals "cash." In November 2018, IEF signaled "cash" and this month it is the only asset class signaling "invested."
