US Market Snapshot - the patient investor

The gauge on the left indicates whether the market is in a bull or bear phase, and the indicator on the right reflects the current valuation of the stock market. Stock market pricing indicates whether stocks are cheap or expensive in relation to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because market valuations are high; however, we recommend exercising caution when adding new positions.

Bull/Bear Market

We have revised the bull-bear market leading indicator to improve its responsiveness, stripping it down to a composite of five key indicators. At present, two of five indicators signal risk-off, indicating medium risk of a US bear market.

Bull/Bear Market Indicator

Stock Pricing

US stock pricing increased slightly to 96.08 from 96.05 percent last week, compared to its high of 96.66 four weeks ago and the recent low of 91.79 ten weeks ago.

US Stock Market Value Indicator

We use z-scores to measure each indicator's current position relative to its historical data, with results expressed in standard deviations from the mean. We then calculate an average of the five readings and convert that to a percentile. The higher the stock market price measure is relative to the historical mean, the greater the risk of a sharp drawdown.

Buffett Indicator

Warren Buffett's favorite long-term measure of stock market valuation provides a stable valuation ratio largely unaffected by fluctuating profit margins. The ratio of stock market capitalization to GDP increased to 3.21 from 3.19 last week, approaching its recent high of 3.24 from three weeks ago, and well above its long-term average of 1.2. Buffett Indicator: Stock Market Capitalization to GDP

Shiller CAPE

Robert Shiller's CAPE smoothes out business-cycle effects by comparing the S&P 500 index to a 10-year average of inflation-adjusted earnings. The CAPE ratio jumped to 40.31 from 39.94 last week. The recent peak of 41.33 from three weeks ago is the second-highest in history, behind the Dotcom bubble in 1999-2000, with values far above the long-term average of 22.4. Robert Shiller's S&P 500 CAPE Ratio

Conclusion

The Bull-Bear indicator suggests the US economy is slowing, but not yet in a recession.

Pricing is growing more extreme, however, increasing the risk of a significant drawdown.

Acknowledgments

Prof. Robert Shiller: CAPE 10 Data
S&P Global: S&P 500 Sales and Earnings Estimates
University of Michigan: Survey of Consumers
Federal Reserve of St Louis: FRED Data
Bureau for Economic Analysis: Motor Vehicles Data

Managing Risk

To find out more, go to Managing Risk on the top menu, or see:

Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.