Price
Source: Advisor Perspectives, Moving Averages Update
Here is the description of the Ivy Portfolio signals at the end of July:
All three S&P 500 MAs are signaling "invested" and three of five Ivy Portfolio ETFs — Vanguard Total Stock Market ETF (VTI), Vanguard FTSE All-World ex-US ETF (VEU) and iShares Barclays 7-10 Year Treasury (IEF) — are signaling "invested". Vanguard REIT Index ETF (VNQ) and PowerShares DB Commodity Index (DBC) — are signaling "cash".This is the third month in a row that VTI and IEF have signaled "invested." IEF has signaled "invested" since the end of November 2018. VTI has signaled "invested" since the end of May 2020. VEU has switched from a "cash" signal to an "invested" signal during this month.
Reviewing the 5-month simple moving average compared to the 12-month simple moving average for SPDR® S&P 500® ETF Trust, symbol SPY, we see the following picture on July 31, 2020, using monthly price data:
Please click on chart to enlarge.
As I stated last month, notice two items on this graph. First, the rate of change of the 5-month simple moving average has started to move up off of a low formed in June 2020. Second, notice that the 5-month simple moving average crossing below and then above the 12-month simple moving average has captured periods of weakness in the economy over the last ten years.
Bruce Bittles and William Delwiche, CMT, CFA, Investment Strategists at Baird, published their Investment Strategy Outlook on July 9, 2020. In it they ask one of the fundamental questions for the remainder of this year:
"From the perspective of the market, the most important question for the second half is whether the remarkable rally that emerged over the course of the second quarter was a sign of sustainable strength or just a volatile reaction to unsustained weakness."
Sentiment
Source: CNN Business Fear & Greed Index
The level of the CNN Business Fear & Greed Index shifted from "Neutral" to "Greed" during the month of July. As of the start of August, none of its seven components indicate "Fear" or "Extreme Fear."
Turning our attention to the CBOE Volatility Index, (VIX), it spiked up at the end of February 2020 and has remained elevated, above 25, since then. It is uncommon for this volatility gauge to remain over 25 for four consecutive months. It has started to come down slightly and starts the month at 24.13.
Valuation
Liz Ann Sonders, Chief Investment Strategist at Schwab, wrote her latest market comment Running on Faith: Are Stocks Discounting Too Powerful of an Earnings Recovery? In it she updates her valuation chart and wrote the following:
"...valuation is in the eye of the beholder, and a function of which metric is chosen. As I’ve often noted, I could find the most bullish and most bearish of investors; and hand each of them a valuation metric that perfectly supports their view. Although standard P/E ratios suggest the market is extremely expensive; most valuation metrics that use a “lens” of interest rates/inflation—like the Fed Model and equity risk premium (relative to Treasuries)—suggest the market is inexpensive."
Please click on chart to enlarge
Source: Schwab
To shift gears from traditional valuation measurements, let's review the S&P 500 to Gold ratio. Notice that the value of the ratio of the S&P 500 to Gold fell in July; this could be a significant chart to pay attention to during the coming decade.
Please click on graph to enlarge
Source: Macrotrends
PSV (Price, Sentiment, Valuation) Summary
Price indicators show three of five asset classes (VTI, VEU, IEF) tracked by the Ivy Portfolio signal "invested" and two (VNQ, DBC) signal "cash." According to the CNN Business Fear & Greed Index, sentiment indicates "Greed." Valuation analysis reminds investors that few bargains exist in this market.
Market Perspective
I'll keep this update as short as possible. I'm waiting for the market to lead policymakers to increase fiscal support. Dollar depreciation is contributing to higher markets. As of the end of July, the 10-year treasury bonds were trading at record low closing yields going back 234 years according to Jim Reid, Deutsche Banks chief credit strategist. Low treasury yields, a falling U.S. dollar and rising commodity prices confirm stagflation conditions could be starting to impact the U.S. economy. Working from home, remote learning for schools, and social distancing are creating a mini-boom in technology spending and select e-commerce entities.
Daily Treasury Yield Curve Rates for the Month of July
Please click to enlarge
Source: Treasury Department
Economic Perspective
Source: Hoisington Quarterly Review and Outlook Q2 2020
The number of countries experiencing recessions in 2020 shows investors that, in terms of percent of countries experiencing recession, this is the broadest global economy downturn since 1871. As Lacy Hunt and Van Hoisington wrote in their quarterly update:
"The World Bank indicates that a record 92.9% of the world’s countries are in recession in 2020 [Chart Above]. This level is well above the previous high recorded in the Great Depression of 83.8%. It also exceeds the highs registered in 1914 at 70%, 1918-1921 at 70%, and 2008-09 at 61.2%. There have been 14 global recessions from 1871 to 2020."They conclude:
"Recessions are either deeper or longer lasting when a very high percentage of the world’s economies are contracting rather than when they are centered on a limited number of countries."To reinforce their perspective that global recessions are deeper, please examine unemployment data. A significant change happened with the July 23 release of weekly initial unemployment claims, initial claims stopped decreasing. Currently, the United States has recorded 19 weeks of over 1 million initial weekly unemployment claims (Note: the highest reading of initial weekly unemployment claims during the 2007-09 recession was 626,000). As you can see in the chart below, U.S. initial weekly unemployment claims increased for two consecutive weeks in July.
Please click on chart to enlarge
Source: Trading Economics
Demographics during the 2020's
Baby Boomers born between 1946-1964 enter the decade 74 to 56 years old. Boomers will all be over 65 in 2030. Let's look at another slice of our population, K-12 students. They'll graduate high school from 2020 to 2033. Thus, the United States will have over a decade's worth of high school graduates permanently impacted by the pandemic.
According to Hedgeye Demography analyst Neil Howe, America has another demographic problem as we start this decade. It has a slowly growing working age population. He has a short video (less than 4 mins) Neil Howe: An Epic Working-Age Population Slowdown Dead Ahead In U.S explaining this concept, which he published in May 2018.
Let's end with two quotes:
"The complacency is through the roof. All kinds of warning signals. The conditions for another riskoff period are in place and no one is seemingly paying attention." - Michael Gayed, CFA
“Healthy citizens are the greatest asset any country can have.” -Winston ChurchillAs 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:
- Just Plain Bad | Unemployment Claims Outlook (Hedgeye)
- Estate planning for the digital era (Fidelity Viewpoints)
- Running on Faith: Are Stocks Discounting Too Powerful an Earnings Recovery? (Schwab)
- Opinion: The hidden risk in your S&P 500 index fund (MarketWatch)
- 3 Retirement-Income Challenges You Might Not Expect (Schwab)
- Hoisington Quarterly Review and Outlook Q2 2020 (Hoisington)
- Systemic Risk Rising? Warning Signs Inside Credit Markets (Hedgeye via YouTube)
- Why August in a pandemic is a time for vigilance for stock market investors (MarketWatch)
- Episode 108: Dr. William Bernstein: Praying for a Bear Market (Rational Reminder)
- U.S. Dollar Outlook: What Could a Weaker Dollar Mean for Your Portfolio? (Schwab)
- Fed officials warn on 'thick fog' ahead for U.S. economy as recovery concerns deepen (Reuters)
- We Thought It Was Just a Respiratory Virus (UCSF Magazine)
- Resetting Our Response: Changes Needed in the US Approach to COVID-19 (The Johns Hopkins Center for Health Security)
