Inside The Stock Market ...trends, cross-currents, and outlook
Relentless, But Risky
The market’s September gain was its fifth in a row and tenth in the last eleven months. If the S&P 500 is up in October, it will mark the first time since 1942 that each of the seasonally “weak” months (May through October) will have seen a gain.
Bubbling Up!
We’ve acknowledged that this rally does not have the bubbly “feel” of either 1999 or 2021, and the absence of giddiness is a reason many pundits think stocks can move much higher. Nonetheless, the stock market is very close to a full-blown bubble: An average of four key valuation metrics places them only one percent away from the historic peak of January 2022—the craziest market top of all time.
The LEI: Historically Out Of Sync
Admittedly, for much of this year, we’ve been wrong in our view that the U.S. economic path was pre-recessionary. We’re in good company: In 2024 the LEI Index has produced the worst three quarters in its 65-year history. Historically, there has been a solid relationship between the LEI and subsequent growth in real GDP; this year’s misses are peculiar.
Job Market Reality Check
Yes, the labor force is growing, but the rate is by no means “rapid.” In fact, its growth rate over the last 12 months of just 0.6% is weaker than any pre-recessionary period since 1956-57.
Gaining Wealth, But Losing Ground?
The recent decline in the Present Situation Index is consistent with a recession already in progress. While we are not in the camp that a recession has begun, the loss of confidence is part of a self-feeding spiral that eventually leads to one.
Elections: The Stock Market Knows
An excellent forecaster of election outcomes over the last 100 years is the stock market, itself. Measured over the three-month period through election day, if the S&P 500 has a gain, the incumbent party historically prevails; a negative return predicts a loss for the incumbent. This simple method has correctly identified the White House winner in 20 of the past 24 elections.
Time To Look Abroad?
Extreme stimulus announced by China had the desired effect of spiking the country’s stock market. The move did not trigger our EM Allocation Model; however, if the reversal is for real, there is plenty of time. The EM P/E multiple gap is so extreme that one wouldn’t miss out if they prefer to wait for more compelling confirmation than the fireworks of the last couple of weeks.
It’s All Relative
Why does the median S&P 500 stock now look relatively cheap? It’s solely because the asset to which it’s compared—the cap-weighted S&P 500—is back near valuation levels only seen during full-blown bubbles. As of September 30th, 50 of the 500 index members traded above 10x sales, a figure considered ludicrous only five years ago.
Stocks Vs. The Economy
An economic downtown with little or no forewarning from stock prices is possible, but against the odds. Nonetheless, prior to 1950, there were three cases in which stock market gains failed to inoculate the economy against a recession. Today’s the stock market capitalization has become so large relative to the economy that stock price movements affect the outlook for growth and inflation more than ever before.
Paying Tribute
It’s true that we’ve written a few bull-market obituaries throughout the years that turned out to be premature. To make amends, we’ve decided to pen a tribute to the current bull market, whether or not it is about to end (… or even if it might have already terminated, in mid-July).
How The Bull Stacks Up
Bull markets that lacked a traditional recessionary “father figure” had shorter lives (33 mos. vs. 61 mos.) and produced gains just one-third the size (+63.6% vs. +186.9%). If today’s SPX bull matched the return of its four most-cyclically relevant predecessors, it would extend until May 2025, and top out at 5,852—8% above its September 6th close. (Not great.)
Not Quite Thrust-Worthy
No bull market in history has faced stiffer monetary headwinds than the one that began in October 2022. Despite that challenge, stocks have illustrated the technical vitality of a youthful bull.
Valuations: Back To The Brink
Since the end of March, the S&P 500’s 12-Mo. Forward EPS estimate is up 6.2%; our 5-Yr. Normalized EPS estimate for the S&P 500 is up 4.2%; and 12-Mo. Trailing Cash Flow Per Share for the MSCI USA Index has increased 4.6%.
Still Betting Against The “Q’s”
We think Mega-Cap Tech valuations are extremely hard to defend, even under the rosiest AI scenarios. The last couple of months have seen those stocks finally come under serious scrutiny—and such skepticism comes at a precarious time, both technically and psychologically.
Has The Inversion Ended?
The yield curve is back in the spotlight, as the yield spread between the 10-yr. Treasury and 2-yr. Note finally flipped positive on September 4th, after a record 26 months of inversion. While some economists claim this steepening implies a recession is now imminent, the historical record of such “un-inversions” is a mixed bag—in some cases the recession was still eight months- to over one-year away.
Foiling The Fed’s Efforts?
2022-24 monetary tightening has been one of the most aggressive cycles in history, but other stimuli may have muted its impact. First, fiscal policy has been conspicuously looser than any prior period of tight money. Second is the stock-market wealth effect: U.S. equity market cap has leapt nearly $12T (~40% of GDP)—a larger wealth increase (versus GDP) than that of the entire 1982-1987 bull market.
Have The Dollar Bears Been Right?
The DXY is one of the few measures that shows the dollar is better off than it was four years ago. One dollar tucked under the mattress on the eve of the pandemic is now worth just $0.82, the steepest decline over such a short period since the early 1980s.
Employment: Normalizing Or Stalling?
The labor market is weakening, but the bulls prefer to say it is “normalizing.” While the latest tally of 7.7 million job openings is impressive, the last two-years’ decline seems too steep and too persistent to be called “normalization.” The slowdown also leaves the payroll-employment growth rate perilously close to the 1.4% economic stall speed seen at the outset of all but one previous recession.
Homebuilders: Are We Too Greedy?
Homebuilding stocks are up more than fourfold since mid-2017, yet the group still ranks as the sixth most attractive among >100 industries we monitor. High mortgage rates and the frozen market for existing homes may continue to benefit the builders. Still, Homebuilding stocks are now near 2.0x price/book—a threshold that coincided with prior peaks in the group’s long-term relative strength.
Getting Carried Away
The Bank of Japan’s move to life rates to 0.25% was deemed the end of the “yen carry trade,” and it drove the stock market’s fear gauge to levels reserved for history’s worst catastrophes.
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