Is the Market Too High to Buy?

By David B. Armstrong, CFA | Jun 27, 2017 | Weekly Market Commentary

Sounds like a good title for a stoner movie…

Anyway – Here’s a quote from the weekend Bespoke report:

The S&P 500 made its 24th all-time closing high on Monday, but after three straight down days through Thursday, stopped there. Overall, though, the trend higher continues. The bull market remains innocent until proven guilty, and until that changes it’s hard to justify taking anything other than a positive view towards the market. As we will detail later in the report, it may not be as innocent as it was during prior legs higher, but the internals are far from collapsing.

They then presented this chart, below.

2017 has been a good year. So far, the biggest peak to trough drop was around -2.8% over a 32-day period (March-April window).

I’m not saying it’s a screaming “buy” but I’m also not pounding the table that no one should be exercising a systematic buy program. If you put long-term cash to work now, you may not be overwhelmed with returns over the next year. But if you look back on today 10 years from now, I’ll bet you’d be happy.

Not a recommendation either way…I’m just sayin’. (That’s my compliance disclosure and CYA.)

The charts below are from Bespoke.

Got Milk?

Or at least an abundance of Tech and Health Care? If not, you are probably in line with the market for the calendar year. (Chart: Bespoke)

How We Got Here

There’s no real commentary here other than…wow. At first blush this will look like a lot of spending, but because it’s a percentage of GDP, the 8-9 years of sluggish economy have been fuel of this fire, too. We really need to get the economy going for this to dip back down like the 90s.

The Yield Curve and Recession

You are going to start reading more and more about the yield curve flattening. The yield curve measures the difference between short term interest rates and longer term interest rates. It is generally defined as the difference between the 2-year Treasury and the 10-year Treasury.

When it is steep, it means that the interest rates you pay for longer term loans is higher than for shorter term loans. It’s a signal that investors, lenders and borrowers all think the economy will be growing more quickly in the future. When it flattens due to market forces it’s because those same people expect the economy to suck or get suck-ier in the future.

Right now, it’s positive 80 basis points. This means the 10-year is 8/10ths of a percentage point HIGHER than the 2-year.

Inverted means that the 2-year Treasury will have a higher interest rate than the 10-year and it is a near perfect predictor of a recession. PROBLEM – it does not signal WHEN the recession will begin.

It’s worth watching and believe me it will be on the news if it keeps flattening…you think news coverage of “Flippin’ the 6th” for the special election in Georgia was all over the news… wait until the yield curve inverts.

But remember, the path of the curve is not a predictor of inversion. I think the thing that’s most important about the curve is that it makes it really hard for the Fed to keep raising rates or THEY will invert it rather than the market.

For example, look at the period between the 1991 recession and the one around 2001…yield curves can be flat or flattening for a very long time while the stock market continues to do well. In fact, the current spread is wider now than for most of the 90s.

My point is to be aware, but don’t get sucked into a fear cycle. This chart is helpful to see that Leading Economic Indicators and Coincident Economic Indicators are not signaling recession. (Charts: Bespoke)

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