In mid December an Interim Memo was sent advising clients of a negative change in our Early Warning Index, an indication that an intermediate top was forming. It has been about four weeks since that alert and the work has continued negative.
There were plenty of interesting facts to be discovered in reading the latest mutual fund flows report from the Investment Company Institute (ICI). The recently released report, which detailed the statistics for September, showed that there were nearly $15 billion of net redemptions from U.S. equity funds for the month. September, by the way, was a month where the S&P 500 rallied to an 8.8% gain. We have noted in the past that the public is generally a trend following herd that buys into market strength and sells on weakness.
Stock/bond Risk-reward relationship beginning to return to normal. Back in Q1 2009, performance differential between S&P 500 and 10 year T-bonds was at generational lows. In prior periods of bond superiority, stocks ultimately came soaring back. Expect to see stocks do much better over next 5 years.
So, over the long run, stocks are supposed to provide better returns than bonds as compensation for taking greater risk. Well the last 20, 30, and 40 year periods show that bond and stock returns have been at the smallest performance spreads ever. In some cases, bonds actually produced better returns. It’s pretty depressing huh?
Each January, this publication has presented a look back at the prior year’s best and worst industry groups and institutional stocks.
December's stock market was a mixed up affair, but this is not unusual for December.
The histograms in the following pages are taken from the January 1993 edition on Benchmarks.
Comparing cash flow yields with bond yields we find that stocks are not significantly overvalued compared to bonds. Stocks are not yet comparatively cheap, but they come out much better in this stock/bond comparison than in the dividend yield/bond yield comparisons or in the earnings yield/bond yield comparisons.