Inside The Stock Market ...trends, cross-currents, and outlook
In the middle of the last decade, we marveled at the Tech sector’s ability to flog the rest of the market quarter after quarter, with no meaningful breakout in valuations. Specifically, the median Price/Cash Flow ratio for S&P 500 Technology managed to “hug” the 15x level for about four years beginning in late 2013. Tech’s post-COVID boom is nothing of the sort.
Those in their peak earning years (40s and 50s) who’ve also enjoyed the stock market’s windfall gains are very likely to have seen their annual expenses climb much higher than the Consumer Price Index over the last several years.
The gap between YOY growth rates in M2 and nominal GDP just flipped negative after four quarters of record-high readings. In other words, the recovering economy is now drinking from a punch bowl that the stock market once had all to itself. Similar drinking binges occurred in 2010 and 2018, both of which then experienced corrections north of 15%.
At the August 5th, S&P 500 bull-market high, seven of our eight bellwethers had failed to make a “confirming” high during the prior month of trading—up from six non-confirmations a month ago. “The dog that didn’t bark” (yet) is the S&P 500 Equal Weighted Index.
In the week ended July 23rd, the NASDAQ accomplished a rare feat by closing at a 52-week high at the same time that more of its members were pegging 52-week New Lows than New Highs. That last occurred at the exact NASDAQ high preceding the GFC collapse; there was also a timely warning ahead of the crash of 1987.
A new market high that is not confirmed by the stocks of companies that “move the goods” is a warning signal. We reviewed the Transports’ action in all years the S&P 500 accomplished a 12-month high during the month of July, like it did this year.
Today’s Peak P/E ratio implies the S&P 500’s ten-year-forward annualized total return will be in the range of -3%. If this P/E ratio turns out to be as deceptively pessimistic as it was at its worst point in history, the S&P 500 could produce an annualized nominal total return of about +5% over the next decade.
Fifty years ago this month, Richard Nixon formally suspended the convertibility of U.S. dollars into gold. Editorials commemorating this have tended to have a celebratory tone, and why not? Abandoning the gold standard greatly expanded the arsenals and imaginations of policymakers, both of which have been on historic display over the last 18 months.
At some point during the June/July streak of seven-consecutive S&P 500 daily-closing highs, an album from 1980 popped into our heads: Nothin’ Matters And What If It Did—released when John Mellencamp was still known as John Cougar. It brought to mind some “nothin’s” that seem not to matter.