S&P 500 gained 7.01% in August, finishing at 3,500.31. YTD through August 31, 2020 the S&P 500 is up 8.34%. Volatility in markets increased for the last couple of weeks leading up to Labor Day weekend. When volatility rises in stocks, it often spreads to multiple asset classes. Investors frequently need to liquidate positions to calm their portfolio fluctuation. This situation can lead to temporary corrections in markets. How many market participants will need to press the sell button before the VIX is back below 26? Let's examine price, sentiment and valuation at the start of September.
This month, Jill Mislinksi wrote the following at Advisor Perspectives:
"All three S&P 500 strategies are signaling "invested" — unchanged from last month's triple "invested" signal. All 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), Vanguard REIT Index ETF (VNQ), and Invesco DB Commodity Index Tracking (DBC) — are signaling "invested", an increase from last month's triple "invested" signal."This is the fourth 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 signaled "invested" since the end of July 2020. DBC and VNQ switched to "invested" signals at the end of August. Now we wait and watch to see how long the Ivy Portfolio signals can indicate fully invested positioning across all asset classes.
Reviewing the 5-month simple moving average compared to the 12-month simple moving average for SPDR® S&P 500® ETF Trust, symbol SPY, the 5-month simple moving average crossed above the 12-month simple moving average in the beginning of August and remains there today. Since the last recession there have been 5 incidents of this phenomenon and it would be surprising to see it quickly reverse.
Sentiment
The CNN Business Fear & Greed Index starts the month measuring "Greed." This is the second consecutive month where this index starts the month at "Greed." Unlike last month, where none of the seven components of this index registered "Fear" or "Extreme Fear"; this month two components measured these levels. As of September 4, 2020, Safe Haven demand measured "Fear." Market Volatility as measured with the CBOE Volatility Index, VIX, measured "Extreme Fear."
Sentiment
Source: CNN Business Fear & Greed Index
The CNN Business Fear & Greed Index starts the month measuring "Greed." This is the second consecutive month where this index starts the month at "Greed." Unlike last month, where none of the seven components of this index registered "Fear" or "Extreme Fear"; this month two components measured these levels. As of September 4, 2020, Safe Haven demand measured "Fear." Market Volatility as measured with the CBOE Volatility Index, VIX, measured "Extreme Fear."
Turning our attention to the CBOE Volatility Index, (VIX), it spiked up at the end of February 2020 and has remained elevated since then. It is uncommon for this volatility gauge to remain over 25 for multiple, consecutive months. It started to drop slightly in August. As of this writing on Labor Day weekend, the VIX>30 again, which tells us we should be cautious with risk taking in the market.
For more on sentiment, view Baird's Sentiment Indicators Chart in their Market Note for the week of August 31, 2020. Reporting on eight indicators show two measure "Neutral" and six indicate "Bearish" from a contrarian perspective.
Valuation
Valuation
Source: multpl.com
The September 4, 2020, the Price to Sales ratio for the S&P 500 shows investors in large cap U.S. stocks are purchasing shares at the highest valuations since 2001 when the data on multpl.com starts. If you visit the link above you can see the data graphed from 2001 to present.
Turning our attention to another valuation metric. Let's review the Buffett Indicator Variant: Wilshire 5000 to GDP (below). Notice this data set also indicates stocks are at their most overvalued point since 1970.
Source: Market Cap to GDP: An Updated Look at the Buffett Valuation Indicator, Adviser Perspectives
PSV (Price, Sentiment, Valuation) Summary
The Ivy Portfolio signals to be "invested" in all asset classes, with a slight caution toward VNQ on the 12-month simple moving average data. The CNN Business Fear & Greed Index started the month measuring "Greed." Valuation continues to show investors few bargains exist in this market and many valuation metrics, such as the Wilshire 5000 to GDP ratio and the Price to Sales ratio for the S&P 500 indicate record high valuation levels.
Economic Perspective
The response to the negative economic impact of COVID-19 included massive fiscal, monetary and regulatory policy adjustments temporary boosting the economy and markets. These actions have basically slowed the credit cycle from functioning normally. The global recession, which started in February 2020, has probably not run its course as the negatives of insolvency and credit risk have yet to fully spread through the global economy. At this juncture, many Keynesian economists suggest the U.S. should do another round of significant fiscal support with the logic being that households are suffering and the positives of too much support outweigh the risks.
As of this writing, Keynesian economists must feel disappointed as they watch fiscal policy support diminish. Many unemployment benefits have ended and legislators in Washington D.C. disagree on the amount of new stimulus needed to support the U.S. economy. Last month I wrote, "I'm waiting for the market to lead policymakers to increase fiscal support." As of this writing, nothing has changed.
Monetary policy has added substantial liquidity into the financial system. Pay attention to the significantly expanded Fed balance sheet. Fed actions, especially in bond markets, have reduced natural price discovery, which makes it more difficult to anticipate insolvencies and increases the number of zombie companies. A large question hanging over the market as we enter the last month of the third quarter of 2020 is: how much inflation will the economy experience over the coming quarters?
Market Perspective
To understand the current market, we need to read The Felder Report's July 22, 2020 free excerpt titled If That Was a Bubble, What's This?. Jesse Felder wrote:
Just three stocks, Apple, Amazon and Microsoft, make up more than 16% of the S&P 500 Index and over a third of the Nasdaq 100 Index. Together they are now valued at nearly $5 trillion. That’s larger than the entire economy of Germany and roughly the size of the Japanese economy. What is really most astounding, though, is the aggregate valuation of these three behemoths relative to their free cash flow. Only at the peak of the Dotcom Mania have we seen anything like it – which begs the question: ‘If that was a bubble, what’s this?’
Now read Jesse Felder's September 2 post, A Speculative Feeding Frenzy Like We've Never Seen Before. He shows investors how the rise in options demand has forced market makers to purchase stocks of the call options they are selling. If this situation unwinds, it could have a dramatic impact on stocks, particularly technology stocks. September will show us if this is a short-term technical event or if it has ripple effects throughout markets causing the next downturn as investors sell positions in an effort to reduce volatility in their portfolios.
To learn more about the market please visit Danielle Park's site Juggling Dynamite. Give her latest bi-weekly market update a listen, where she covers many topics including: the dollar, cost cutting, leverage and demographics. Her main message: current market euphoria is unsustainable. For another perspective listen to Real Vision's Daily Briefing – September 4, 2020 episode where Real Vision CEO, Raoul Pal, is joined by senior editor, Ash Bennington, to reflect on price action during the week of August 31 through September 4.
Wishing everyone a Happy Labor Day!
As always, wise investing my friends.
Here's what I've been reading, watching and listening to recently:
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:
- David Rosenberg: No matter how you slice it, markets are in a bubble of historic proportions (Financial Post)
- The Post-Capitalist Hit of the Summer (Project Syndicate)
- A penny pinch: How America fell into a great coin shortage (WaPo)
- Guy Kawasaki's Remarkable People podcast w/ Prof of Marketing at NYU Stern School of Business, Scott Galloway (Remarkable People)
- CDC Directs Halt To Renter Evictions To Prevent Virus Spread (AP)
- A majority of young adults in the U.S. live with their parents for the first time since the Great Depression (Pew Research)
- Michael Green – Global Macro Series – 4th August 2020 (Top Traders Unplugged)
- Campbell Harvey – Global Macro Series – 19th August 2020 (Top Traders Unplugged)
- Claudia Sahm on Economic Policy Podcast (Masters in Business)
- U.S. Job Gains for Next Decade Projected To Be Much Slower Than After 2008 Crisis (Bloomberg)
- 7 Steps to Estimating Your In-Retirement Cash-Flow Needs (Morningstar)
- Social Security has a quick cash solution (Investment News)
- Two Social Security Strategies to Take the Sting Out of Covid-19 Job Losses (Barron's)
- Get ready to see how much you REALLY have saved for retirement (MarketWatch)
