Once a month, on the Wednesday following the 15th of the month, I will put up a long term view of the market. This is provided for investors who don’t want to trade secondary swings in the market, but would like to exit the stock market relatively soon after a bear market begins, or enter the market after a new bull market begins (change in the primary trend). In the blog, they will always have a title called “Long Term (month) (year)”, so you can use your browser “Find” function and easily find them.
GDP – Third quarter GDP was revised down a bit from 3.5% to +3.4% for the third estimate on Dec. 21. Through three quarters, the average GDP growth is 3.2%, a nice growth rate.
The Jan. 16 update from the Atlanta Fed on GDPNow for Q4 is +2.8%, which is a good number that would drop growth for the year to 3.1% which is still a good number.
Annual GDP growth had been stable for a few years at a 2% annual rate and moved up a bit in 2017 to 2.6%. This GDP number supports the assertion that the bull market continues.
Fed interest rates – The Fed raised the Fed Funds Rate .25% to the range of 2.25 – 2.5% on Dec. 19, as expected, but they also indicated they see only two rate hikes in 2019 instead of the three they previously discussed.
Following the 12/19 press conference, the market proceeded to sell off hard. Various Fed governors came out and softened the language saying they would be “data dependent” and not raise rates if the economy weakened. Investors had been concerned that if the economy slowed due to the China trade war that the Fed was not indicating that it could cut rates to support the economy. The Fed also indicated more flexibility on slowing the runoff of their balance sheet (as Fed owned bonds matured, selling them into the private market). The market took the signs of greater Fed flexibility positively and we have rallied off of the late Dec. stock market low.
I was getting too much data in the table below and I thought readers would ignore it. I decided to average the data for each quarter that was over a year old. In that way I can keep a lot of meaningful data, and the reader will not have to wade through too much detail. At least that is the plan. Eventually I can average 4 quarters of data and keep some “years summary” data. Then I can revisit the plan in 10 or 20 years, if I’m still blogging! 🙂
While rates are rising, I do not see a hostile interest rate environment. For now, rates still support the long term bull market.
|Date||Fed Funds Rate||5 Year Treasury||10 Year Treasury||30 Year Treasury|
|Jan 16, 2019||2.4||2.6||2.7||3.1|
|Dec 19, 2018||2.4||2.6||2.8||3.0|
|Nov 21, 2018||2.1||2.9||3.1||3.3|
|Oct 17, 2018||2.1||3.0||3.2||3.3|
|Sep 19, 2018||1.9||3.0||3.1||3.3|
|Aug 15, 2018||1.9||2.7||2.9||3.0|
|Jul 18, 2018||1.9||2.8||2.9||3.0|
PE on S&P 500 – The current 12 month trailing GAAP PE on the S&P 500 is 18.5, down from 20.3 last month. I used 4 quarters of earnings with the most recent being Q3 2018.
This metric is neutral due to the recent correction in stock prices, relative to my trimmed 30 year average of 19.
This valuation is based on the Jan. 9th market price, after its recent significant drop. The market is not overheating in this late stage of the expansion, which is good. On the other hand, one might reasonably ask why the market did not do better in 2018 with the strong economic performance. Higher interest rates from the bond market are starting to attract investment that a few years ago would have flowed into stocks. This has the natural effect of lowering the P/E that investors are willing to pay for riskier stock investments, relative to bonds. Also, the stock market rose following the Trump election on the PROMISE of what he would do, and the benefits of deregulation and tax reform. Those effects are fully in the market now, and we are looking at a possible slowing of GDP growth and earnings, and negative effects of the China trade war.
In a bull market with valuation at the long term average level, this indicator is supportive of the bull market.
S&P earnings – The latest earnings estimate from Factset is for 10.6% higher earnings for Q4 than in the prior year (revised down from 13% last month). These downward forecast earnings revisions are why I prefer to use trailing estimates for the valuation just above, because the trailing estimates DO NOT CHANGE, they are facts. The forward looking estimates are useful, but you must take them with a grain of salt. Look around at the world and see what else is going on. Are the estimates too high?
This indicator is supportive of the bull market, but if estimated earnings for 2019 are continually marked down, volatility will continue.
Age of primary move, bull or bear market – The bull market is 9.8 years old, which is a long bull market by historical standards. In and of itself, this is meaningless. It does provide some perspective that one should keep in mind.
Tension between Saudi Arabia (Sunni center) and Iran (Shiite center) has reached a level that bears watching, centered in the Yemen conflict (noted Dec. 2017).
In the US, we are approaching the point in the investigation into Russian meddling in the 2016 US presidential election where we will find out whether charges will be filed against the president’s closest advisors. At that point a constitutional crisis could emerge. A constitutional crisis is not a given, but if it occurs, I would expect the stock market to retreat for a while. (noted January 2018)
Trade wars are in effect with China and the EU. I think some of the objectives Trump pursues are valid, but I am not confidant the method being used is the best. This is causing serious pain to some segments of the economy, notably anyone that uses steel to make their products, and for farmers trying to sell their products. Growth is slowing in both Europe and China. This is already a small negative for the economy, but currently the reports out of China on trade talks with the US are mildly positive.
Global geo-politics is supportive of the bull market, currently. The trade issues are less supportive of the bull market than a year ago.
January has been a good month so far, up about 5%.
Technically the market if flashing a caution sign on a long term basis. Clearly we have had a significant correction the last 4 months. However, we have not violated the long term uptrend channel decisively in both magnitude and duration. The RSI at the top of the chart is at 52 which is neutral. On a long term basis, if the downturn is a correction and not the start of a primary bear market, we could be near the bottom. Momentum shown by MACD at the bottom of the chart is still in a downtrend, which is a negative. The price action is questionable, having violated the bottom of the uptrend channel, but the market has rallied in January and if this does not get worse, it may show the bull market remains intact.
Both the 50-month and 200-month moving averages are rising and the market action remains above both of them, a positive sign on a long term basis.
The market’s technical indicators support the thesis that the long term bull market remains in force, however that support is the weakest it has been in over six years.
The stock market remains in a long term bull market technically, and there is nothing in the general economy, in Fed policy, or in the global geo-political realm to overturn that conclusion. However, the price action of the market has dipped below its long term uptrend lower level and this is a significant danger. If this persists it would indicate the primary trend of the market has changed.
Long Term Issues to Keep in Mind:
Federal Deficit: (Negative – Noted Jan. 2018) It will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts. This has not been shown to work in the past. With the Fed no longer buying the US government debt that is currently running at $650 billion per year, and will likely expand to $750 billion per year, who is going to buy that debt, and what interest rate will they demand before committing their capital to that investment? If that causes interest rates to rise unexpectedly fast and high, that would pose a significant risk to the US economy.
With the ECB ending their QE bond buying by the end of 2018, and probably beginning to raise rates in 2019, this may divert some buyers of US treasury bonds to Euro bonds, and that would put upward pressure on US interest rates (noted June 2018).
The total national debt exceeds $20 Trillion, and as interest rates rise, the component of the annual budget allocated to “interest on the debt” will increase, putting pressure on existing programs, or increasing the deficit. If the deficit is allowed to rise too much in good economic times, the value of the dollar will fall and that is inflationary which is usually bad.
Rich Comeau, Rich Investing