Once a month, on the first Wednesday 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.
I made some format changes to section headings. When I used to cut and paste from Word into WordPress.com, I lost some of the old formatting and had to go fix it every time. I hope this is less busy work for me and more readable for you.
Economics
–GDP:
The second estimate of 2024 Q1 GDP is +1.3%, following Q4’s +3.4%.
The Atlanta Fed GDPNow estimate for Q2 GDP as of June 3 is +1.8%, down from 2.7% a month ago.
This is neutral for the stock market, just below the long term trend of +2%.
| Year | Quarter | GDP % |
| 2024 | Q1 | 1.3 |
| 2023 | Q4 | 3.4 |
| 2023 | Q3 | 4.9 |
| 2023 | Q2 | 2.1 |
| 2023 | Q1 | 2.0 |
| 2022 | Year | 1.0 |
| 2021 | Year | 5.5 |
| 2020 – Covid | Year | 0.1 |
| 2019 | Year | 2.3 |
| 2018 | Year | 2.9 |
| 2017 | Year | 2.6 |
| 2016 | Year | 2.0 |
–Fed Interest Rates:
The Fed has left the Fed Funds rate unchanged at 5.5% for months. The next Fed meeting is June 11-12.
Interest rates ticked down a bit in late May, about .2% across longer duration bonds. The unemployment rate has ticked up a bit, GDP remains sluggish, so sort of a “soft landing” right now.
The bond market is split between one or two rate cuts, beginning in either July of Sept.
At the last Fed meeting, they announced they will scale back Quantitative Tightening from $90 billion per month to $60 billion per month. When the Fed allows bonds to roll off their balance sheet, the private sector has to buy them, which takes money out of circulation. This has been good policy to reduce inflation. But we don’t want to slow the economy so much that we slip into recession. This looks like a good first step to stop taking so much money out of circulation.
Local and regional banks have tightened lending standards making it harder for small and medium businesses to get loans to expand. That will slow the economy down somewhat.
The latest CPI was +3.4% versus a year ago. Interestingly oil has fallen a bit lately.
Fed policy is restrictive for the economy, and bearish for the stock market. But we are probably at the peak of interest rates, we have been on pause, and the next move appears to be down.
| Date | Fed Funds Rate | 5 Year Treasury | 10 Year Treasury | 30 Year Treasury |
| Jun 2024 | 5.5 | 4.4 | 4.4 | 4.5 |
| May 2024 | 5.5 | 4.7 | 4.7 | 4.8 |
| Apr 2024 | 5.5 | 4.7 | 4.7 | 4.8 |
| Mar 2024 | 5.5 | 4.2 | 4.2 | 4.4 |
| Feb 2024 | 5.5 | 4.3 | 4.3 | 4.4 |
| Jan 2024 | 5.5 | 4.0 | 4.1 | 4.4 |
| 2023 Q4 | 5.5 | 4.4 | 4.4 | 4.5 |
| 2023 Q3 | 5.5 | 4.4 | 4.3 | 4.4 |
| 2023 Q2 | 5.1 | 3.8 | 3.6 | 3.9 |
| 2023 Q1 | 4.7 | 3.8 | 3.6 | 3.8 |
| 2022 Year | 2.8 | 3.1 | 3.1 | 3.2 |
| 2021 Year | 0.2 | 0.8 | 1.4 | 2.0 |
| 2020 Year | 0.4 | 0.6 | 0.9 | 1.6 – Covid |
| 2019 Year | 2.2 | 1.9 | 2.2 | 2.6 |
| 2018 Year | 1.8 | 2.8 | 2.9 | 3.1 – Tax Cut |
| 2017 Year | 1.0 | 1.9 | 2.3 | 2.9 |
Valuation
–S&P 500 Earnings:
Factset shows that as of May 31, for Q1 of 2024, the blended year-over-year earnings increase for the S&P 500 is +5.9% (the blend is 98% actual earnings and 2% estimated). That is the best year over year quarterly growth in profits in two years! As recently as April, the Factset estimate of Q1 earnings was only .5%. Last December they estimated that Q1 earnings would be up 6.2% vs. last year. It appears to me they are not very good at estimating, yet on CNBC, Factset is frequently cited as the source of earnings estimates.
The forward PE for the S&P is 20.3, up from 19.9 last month when stocks were going down. That compares to the ten year average of 17.8, but remember, the forward PE is just a guess.
The 12 month forward “operating earnings” estimate on the S&P 500 from the Standard and Poor’s company is $250, unchanged from last month.
I have been thinking about how Factset keeps changing the earnings estimates through the year. This is a number the pros look at, but most of us amateurs do not. The question is, if earnings estimates keep coming down, do stock prices eventually come down? They should, or the PE ratio will continue to climb, making stocks expensive on a PE basis. I’m not going to keep much history, only about 12 months of data. The number that Factset should have the most confidence in is the current quarter, Q1, and it has almost been cut in half from Dec. Tracking this should be fun, at least I think so. Old Rich attempts a new trick.
| MONTH | Q1 Estimate | Q2 Estimate | Q3 Estimate | Q4 Estimate | CY Estimate |
| Jun | 5.9% actual | 9.2% | 8.3% | 17.5% | 11.3% |
| Apr | 0.5% | 9.6% | 8.7% | 17.7% | 10.7% |
| Mar | 3.4% | 9.3% | 8.4% | 17.4% | 10.9% |
| Feb | 3.9% | 9.0% | 8.0% | 17.6% | 10.9% |
| Jan | 5.4% | 10.0% | 8.2% | 22.1% | 12.0% |
| Dec | 6.2% | 8.5% | 10.7% | 18.1% | 11.5% |
Chart – S&P 500 Earnings Estimates, by Month
Telling the future is hard. Why do I even bother to report future estimates of earnings? Earnings (profits) drive the stock market. I look to the pro’s for their estimates, then I take them with a grain of salt. Even if the estimates turn out to be wrong, that is the data that the stock market is trading on today. It’s the best we have, and it may be wrong by a little, or sometimes a lot.
The outlook for earnings is bullish at +5.9% for Q1.
–P/E on the S&P 500:
The current 12-month trailing GAAP PE on the S&P 500 is 27.5, up from 26.1 last month. I used 4 quarters of earnings with the most recent being Q1 2024. The S&P rose rapidly over the last month, so the valuation rose.
I recalculated the 30 year trimmed P/E of the S&P 500, which I had not done since I started the blog 8 years ago. The PE rose from 19 to 21 so I will change the terminology of the numerical bands below. The neutral range will expand, centered at 21 instead of 19. The PE rise can be a function of the nature of Information Technology (IT) companies, which are less capital intensive than older smokestack companies. It could also be a function of changing investor sentiment. But, it HAS CHANGED.
This metric is significantly overvalued relative to my trimmed 30 year average of 21. I trimmed out the quarters during recessions for my 30 year average, since the P/E behaves very abnormally during those times. My terminology will be 19 – 22 as neutral, 23 – 26 would be moderately overvalued (neutral), while 27 – 30 would be significantly overvalued (bearish). Above 30 would be dangerously overvalued (bearish). On the downside, I will go with 14-18 being moderately undervalued (bullish) and 9-13 being significantly undervalued (bullish). As a last resort, I will go with 4-8 as being egregiously undervalued (bullish), and hope we never see that because all investors will be in pain at that point. Admittedly these are somewhat arbitrary, but I have been watching this metric since 1995.
This indicator is bearish, but just barely so.
Age of the Primary Move, Bull or Bear Market:
This bull market is 20 months old, started in Oct. 2022. The age is neither bullish nor bearish, but it is worthwhile to keep it in mind.
Geo-Political
–Presidential Election: (added March 2024) – On Nov. 5th we will elect a new president. Joe Biden and Donald Trump are the two primary candidates, and Robert Kennedy Jr. is the main third party candidate. Kennedy cannot win, but he may prevent one of the other two from winning. It depends who he takes more votes away from, and right now we don’t know. Based on forward looking policies, and who the projected winner is, the stock market will start to favor better positioned companies, based on the assumed victorious candidate’s policy priorities. It’s too early to tell, but keep your eyes peeled.
–Liquidity: Central banks globally raised rates to fight inflation, but most are pausing their interest rates. Inflation appears to be coming under control, but it is not where the central banks want it. They appear to be on pause to see if the hikes already in place will slow inflation to the target without additional hikes. The ECB is RUMORED to deliver its first RATE CUT on 6/6, its first since 2019.
–US / China: It appears that the US and China are engaged in a tug of war to see who is the world’s economic leader. China has advantages in low cost labor and some natural resources such as rare earth metals, but they lack oil and natural gas. China developed the ability to produce advanced electronics with the aid of the US, but the primary market for those items is the US and Europe. The US has long been a technology leader and we have sophisticated financial markets that are usually well regulated. Another major factor is global alliances. The US has strong alliances with NATO, Canada, Japan, and S. Korea, while China has a strong relationship with Russia and Iran.
The economy in China is slowing more than their government would like. Trade tension with the US contributes to the distress since US corporations are expanding outside of China, notably in Vietnam and India. The Chinese govt. has been hostile to free market activity by their own corporations such as Alibaba and Ten Cent. Their real estate sector was over leveraged and is in trouble.
–Ukraine: Thewar in Ukraine drags on. Ukraine is having more success on the battlefield than most expected, with the help of western weapons. Russia is destroying much of eastern Ukraine’s cities and rebuilding will be difficult. Sanctions against Russia are disrupting commodity markets since Russia was such a large exporter or oil, natural gas, and metals. Ukraine was a large exporter of wheat and other foods and that export is hindered by the war. It appears that after the initial shock in the commodity markets when Russia invaded, prices have stabilized and the world is dealing with new sources and trading patterns.
–Middle East Conflict: Hamas launched a violent attack on Israel on Oct. 7, 2023 using missiles and ground forces and Israel has responded with bombings inside Gaza. It’s a mess, but impact to the US economy is not noticeable. The Houthi rebels in Yemen are firing missiles at shipping in the Red Sea, causing many ships to go around Africa to Europe instead of using the shorter Suez Canal. That will increase wait times and raise transportation costs.
–US National Debt: (added Sept. 2023) The US national debt is very large at over $34 trillion and it is growing too rapidly. I have been concerned about it since early in this century. If there is too much new debt and investors don’t want to buy the bonds that the US issues to fund the deficit, they may have to keep the interest rates high, particularly longer term interest rates, high enough to attract bond investors. Companies will then have to pay higher rates to fund long term projects and that will cut into their profits. Consumers facing high interest rates will slow purchases. It is not a good situation for the economy.
Geo-politics is currently bearish, mainly due to the wars in Ukraine, global central banks restrictive policy, and the Israeli conflict with Hamas.
Technical
Technically the chart below is bullish near term (months), and still positive longer term (year). It is important to note this is on a “long term” basis, and is not the same verdict as you would see on the weekly report which is a 12 month basis instead of this 10 year view.
RSI at the top of the chart is neutral at 69 and rising, a change from last month. Momentum shown by MACD at the bottom of the chart is positive and rising. The price action is positive near term and positive longer term.
This close to the top of the up-channel, there is the risk of a correction. We can also go higher, above the top of the channel, like we did in 2021, but that was driven by excessive stimulus from the Covid cash infusion cycle from the govt. I don’t see that type of stimulus now, in fact the Fed interest rates are restrictive. What seems to be giving the market this boost is the computing revolution called Artificial Intelligence (AI).
Ten Year Chart of the S&P 500
This is bullish in the short run, and remains bullish longer term.
Conclusion
- GDP growth is neutral with Q1 GDP rising by 1.3%.
- The Fed has short term rates at 5.5%. That is restrictive and bearish.
- S&P earnings for Q1 are estimated to be +5.9% above Q1 2023 which is bullish.
- The PE valuation of the S&P based on the 12 month trailing GAAP number is 27.5, which is significantly overvalued and bearish.
- The geo-political factors are bearish.
- Technically the chart looks bullish short term, and bullish longer term.
By that way of looking at it, the market is bearish, but less bearish than last month. There are three factors bearish (Fed, PE Valuation, and geo-politics), two bullish (S&P Earnings, Technicals), and one neutral (GDP). Remember, this is a long term view.
Long Term Issues to Keep in Mind:
National Debt:
(January 2024) – The national debt is over $34 trillion.
(Late 2020) – The total national debt exceeds $26 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. The thing saving us today is how poorly all the other nations are managing their economies, so the dollar continues to hold up.
(Updated March 2020) – Covid 19 begins. Well this is going to get a lot worse. Looks like the politicians are going to be printing money and dropping it from helicopters. But all the other major economies will do the same thing, so relatively, the dollar may not drop much (which would be bad for inflation).
(Negative – Noted Jan. 2018) The deficit 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. The US added $980 billion to the national debt in fiscal 2019 (ended 9/30/2019), a tragedy in good financial times.
Rich Comeau, Rich Investing
Rich Investing 