Investment markets can be confusing. To try to cut through the chatter and investment slang, we present this monthly view to you. We want to give you a 50,000-foot view of market conditions updated as our view evolves. Currently, our Investment Climate Indicator remains at Stormy. Stormy means that bear market rules apply, and we believe we could be a period of wealth destruction. September and October have reputations as vicious months for stock investors. This was not the case in 2019. This year, the S&P 500 Index gained roughly 2% in each of those months, which brings us to a November that is already looking higher at the start. For someone who has been cautious on the broad stock market since early 2018, the hype over “new all-time highs” in the S&P 500, Nasdaq Composite, and nearly in the Dow Jones Industrials as November began is yet another confirmation of one of the primary rules of investing. Namely, that all the potential bad news is just potential, until asset prices break down That has threatened to happen in the S&P 500 and other major indexes. Heck, last year around this time, that index was in the midst of a 20% drop that many investors either forgot about, or don’t remember in the first place. The holiday season will do that to a person, I get it. So, as Led Zeppelin famously sang, the song remains the same for the “headline” U.S. stock market indicators. Despite the many continued market stress factors noted below, prices can go up anyway.
Retirement party crashers?The real risk, especially for folks in the waning days of their working careers, is that their retirement party will be greeted by crashers. Or, more specifically, market crashers. That is less of a prediction than a monthly reminder to greet new highs as good news, but not as an excuse to stay complacent. As I will point out in the data tables below, the surface is cracking more all the time, and for good reason. Furthermore, we are at risk of another cycle that narrows in scope (fewer and fewer stocks leading the market higher), then rolls over. And, the best news of all: the longer the advances go, the more we can tag along and make some money before our “M-O” turns to exploiting the next stock bear market.
A graph for the season…Don’t get mesmerized by the beautiful autumn colors in the chart below. Here is what you need to know. The stock bull market stalled in late January, 2018. That was over 21 months ago. Since that time, the S&P 500’s total return in those 21 months has been over 10%. That’s not bad, but is a slowing from before 2018. The average S&P stock (in orange) is up 6.5% total in those 21 months. The other indices shown are either based on stocks smaller than those in the S&P 500, or include stocks outside the U.S. (“International” markets, to U.S. investors). Those non-S&P 500 indices have produced between +2.0% and -14.5% during the past 21 months. That is at best a stall, and at worst a sign that the S&P 500 is the last domino to fall in this cycle. And, as many on Wall Street has noted lately, there is a lot of “cancelling out” going on within the stock market.
Upon further review…In other words, a very small number of popular stocks are doing very well (hence, I refer to them as “popular”). The rest of the market is a mix of good and bad that net out to near zero, or worse.
Key Market Stress Points
- Impeachment: it's moving along. And the market doesn’t care. The Nixon impeachment process started the same way, so keep that in mind as your TV explodes with coverage the rest of the year.
- Fed rate decisions: last month I wrote that I think this is fading in importance. This month I say, “look at what Rob said last month.” That is, the Fed’s 3rd rate cut in this cycle only serves to give it less room to get the economy out of a pickle down the road. As a results, it appears that investors and traders are less urgent about reacting to Fed moves, unless and until that pickle presents itself.
- Geopolitical: China trade news is “good.” USMCA is “good.” Brexit is “delayed. Or, is this just an extended dance to an inevitable conclusion that changes nothing, except for the disruptions already caused to global business supply chains? The manufacturing economy is showing persistent weakness, while the services part is doing OK (debt is great enabler, eh?). That is similar to the stock market situation noted above. It doesn’t matter to investors until it does…and then, look out.
- Valuation: In another article I wrote during October, I did a study on what happens when the Shiller CAPE price-earning ratio peaks, then declines meaningfully. This started to happen with the past year. The other times it happened, bear markets happened too. But again, the market, narrow as it is, can stay up longer than any of us think.
- Index mania: S&P 500 index funds are as popular as ever, it seems. That is clearly feeding the narrowing breadth that I have noted a few times here.
- Credit: the credit bubble remains a big concern. The latest I read is about new type of financial poison called “Online Installment Loans.” Look it up and see if you think it helps or hurts the economy’s foundation going forward.
- Bond market risks: as noted below, the bond market has had a very nice run this year. However, there is now threat of a sharp reversal. . That’s what my technical/charting work tells me. And with Approximately 50% of bonds in investment grade bond funds are rated BBB, the lowest of the 4 possible rating categories, falling prices/higher rates could be a generational tipping point for bonds. This may also spark more chatter about a long-awaited return of inflation.
- Sentiment: this is really the one stress point I have written about this year that has already followed through. I have been writing that “TV coverage of the stock market is dominated by companies that don’t make a profit.” In recent months, have seen some pretty amazing drops in some of these stocks. Consider this early-innings for this type of investing, and for growth stocks in general.