The S&P 500 strengthened on Friday, closing at a new high of 3067. Volatility (21-day) crossed below 1%, signaling that risk is easing. Money Flow strengthened; a trough above zero suggests another advance. The medium-term target is 3250.
Dow Jones Industrial Average is weaker, with Money Flow having dipped below zero, but breakout above 27,400 would signal another advance. Target for the advance is 29,400.
“We’re in a hell of a mess in every direction,” is how Paul Volcker, the former Fed Chairman describes it.
Equities are making new highs, while the Fed cuts interest rates. Donald Trump is effectively dictating monetary policy. This could only end badly.
Unemployment and initial jobless claims are near record lows.
Inflationary pressures are moderate, with average wage rates growing between 3.0% and 3.5% (production and non-supervisory employees).
GDP growth is slowing, however, and likely to fall further according to our advance indicator (estimated hours worked).
Payroll growth is also slowing. While this has been explained as a result of record low unemployment (new employees may be hard to find) it is likely that rising uncertainty has played a big part.
The 3-month TMO of Non-Farm Payrolls kicked up to 0.58%, above the amber risk level of 0.5%.
With 73.5% of stocks having reported for Q3, the price-earnings ratio remains elevated. A reading above 20 warns that stocks are over-priced, especially because expected earnings growth is low.
If we project nominal GDP growth (including inflation) at 3.5% and buyback yields at 3.0% (Q2: 3.26%) that gives us anticipated growth of 6.5%. Add dividend yield of 2.0% (Q2: 1.96%) and we can expect stocks to yield a total return (dividends plus growth) of 8.5%.
But that assumes that current price-earnings multiples are maintained. Any downward revision, from earnings disappointments, would most likely result in a negative return.