Category: Countries & Regions

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US Stock Pricing at New High

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, and the one on the right reflects stock market valuation levels. Stock market pricing indicates whether stocks are cheap or expensive relative to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because the market valuation is high. Still, we would advise investors to be circumspect about adding new positions without carefully investigating the underlying value.

Bull/Bear Market

The Bull/Bear indicator remains at 40%, warning of a bear market ahead. Updates to three market indicators (highlighted in orange below) are delayed because of the US government shutdown.

Bull-Bear Market Indicator

The Philadelphia Fed Coincident Economic Activity Index deserves mention in the absence of updates for some of our regular indicators. A decline below 2.5% typically only occurs several months ahead of a recession.

Coincident Economic Activity Index
The Chicago Fed National Financial Conditions Index continues to signal loose monetary conditions, supporting high stock prices.

Chicago Fed National Financial Conditions Index

However, a decline in bank reserves below $3.0 trillion warns that repo markets are tightening.

Commercial Bank Reserves

And Bitcoin continues to test support at 110K, warning of tighter liquidity.

Bitcoin (BTC)

Stock Pricing

Stock pricing increased to a new high of 98.66 percent, compared to an April low of 95.04 percent. The extreme reading warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

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

Robert Shiller’s CAPE index climbed above 40 for the first time ever outside of the Dotcom bubble. CAPE compares the S&P 500 index to a ten-year average of inflation-adjusted earnings.

S&P 500 CAPE

Conclusion

The bull-bear indicator at 40% warns of a bear market ahead, while extreme pricing increases the long-term risk of a significant drawdown.

Acknowledgments

Notes

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ASX Leading Indicators

Bull-Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while the indicator on the right reflects stock market valuation. Stock market pricing indicates whether stocks are cheap or expensive relative to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because the market valuation is high. Still, we advise investors to be circumspect about adding new positions without carefully investigating the underlying value.

Bull/Bear Market

The ASX Bull-Bear Market indicator remains at 56%, down from 66% three weeks ago. Four indicators from Australia and China indicate risk-on, with a 60% weighting, while the US Bull/Bear indicator has a 40% weighting.

ASX Bull-Bear Market Indicator

China’s NBS Manufacturing PMI fell sharply from 49.8 in September to 49.0 in October. A PMI below 49.0 signals risk-off.

NBS China Manufacturing PMI

September Australian building approvals will be released on Monday, where the 3-month moving average was close to a risk-off signal in August.

Australian Building Approvals

Stock Pricing

ASX stock pricing declined to 88.70 percent, compared to a high of 92.23 percent in August and a low of 67.85 percent in April.

ASX Stock Market Value Indicator

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

Conclusion

The ASX bull-bear indicator reflects a mild bear market, while extreme valuation increases the long-term risk of a significant drawdown.

Acknowledgments

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Trump-Xi more of the same

United States President Donald Trump and his Chinese counterpart Xi Jinping have agreed to a trade truce under which the US will ease tariffs and Beijing will restart imports of US soya beans, delay the introduction of export restrictions on some of its rare earth metals, and intensify efforts to curb illegal fentanyl trafficking. (Al Jazeera)

Trump threatened a 100% import tax in retaliation for China’s rare earth restrictions, but he told reporters after the meeting that total tariffs on China would be reduced to 47%.

There is mutual recognition that neither country wants to risk damaging the world economy, as this would harm itself.

When the two were seated at the start of the meeting, Xi read prepared remarks that stressed a willingness to work together despite differences. (APNews)

The meeting was shorter than expected, which indicates that neither side deviated from an agreed-upon script. Trump described the meeting, which lasted an hour and forty minutes, as “amazing” and “12 out of 10,” but analysts remain skeptical.

“The proposed deal on the table fits the pattern we’ve seen all year: short-term stabilization dressed up as strategic progress,” said Craig Singleton, senior director of the China program at the Foundation for Defense of Democracies. “Both sides are managing volatility, calibrating just enough cooperation to avert crisis while the deeper rivalry endures.” (APNews)

The US will likely also reduce restrictions on exports of advanced computer chips to China. According to the president, the issue was discussed, and Nvidia will hold talks with Chinese officials.

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Inflation quiet before the storm

Key Points

  • Core CPI declined to 3.0% for the twelve months to September.
  • However, consumers expect a strong upturn in inflation in the next twelve months.

According to the delayed BLS report for September, core CPI decreased to 3.0% for the twelve months, matching the headline CPI figure.

CPI & Core CPI - Annual

Both headline and core CPI are affected by a sharp monthly fall in Owners Equivalent Rent (OER), which declined to 0.12% in September, compared to 0.38% in August. OER is a major component of CPI, accounting for 26% of headline and 33% of core CPI. (Wolf Richter)

However, sticky CPI less Shelter, which excludes OER, also slowed to 3.0% for the twelve months.

Core CPI, and Sticky CPI

The ALICE Essentials Index also indicates that annual inflation slowed to 3.1%. ALICE (orange below) is produced by United Way as an alternative to CPI (blue) to highlight the impact of inflation on low-income earners.

ALICE Essentials Index

Another alternative inflation measure is Truflation, which tracks up to 15 million online prices to calculate a daily-updated index. Prices are weighted more towards goods than services, which accounts for the lower readings compared to CPI.

Truflation jumped to 2.48% on October 26, the highest since January. The index has increased by 1.9% since April 2, reflecting the impact of tariffs on goods prices.

Truflation

Consumers are unconvinced that inflation is moderating, with last week’s University of Michigan survey indicating an average expected increase of 4.6% in the next twelve months.

University of Michigan: 1-Year Inflation Expectations

They aren’t buying the Fed’s “transitory” pitch either. Expected price increases over the next five years increased to 3.9% in October, almost double the Fed’s 2.0 percent target.

University of Michigan: 5-Year Inflation Expectations

Conclusion

Consumer inflation is currently close to 3.0%. The University of Michigan survey indicates that consumers expect prices to rise by 4.5% over the next twelve months and that inflation will be persistent rather than “transitory.”

Acknowledgments

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US stock pricing at new high

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, and the one on the right reflects stock market valuation levels. Stock market pricing indicates whether stocks are cheap or expensive relative to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because the market valuation is high. Still, we would advise investors to be circumspect about adding new positions without carefully investigating the underlying value.

Bull/Bear Market

The Bull/Bear indicator remains at 40%, warning of a bear market ahead. Updates to three market indicators (highlighted in orange) are delayed because of the US government shutdown.

Bull-Bear Market Indicator

The University of Michigan consumer survey indicates that perceptions of current economic conditions dropped to 58.6, the lowest level in more than three years. Readings below 100 signal risk-off, but the Chicago Fed National Financial Conditions Index or 30-week Smoothed Momentum for the S&P 500 still needs to confirm this.

University of Michigan: Current Economic Conditions

Stock Pricing

Stock pricing increased to a new high of 98.59 percent, compared to an April low of 95.04 percent. The extreme reading warns that stocks are at long-term risk of a significant drawdown.

Stock Market Value Indicator

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

The Price-Earnings ratio of highest trailing earnings eased slightly to 29.3, but remains extreme compared to the fifty-year average of 16.3.

S&P 500 PE of Highest Trailing Earnings

Conclusion

The bull-bear indicator at 40% warns of a bear market ahead, while extreme pricing increases the long-term risk of a significant drawdown.

Acknowledgments

Notes

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ASX extreme pricing continues

Bull-Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while the indicator on the right reflects stock market valuation. Stock market pricing indicates whether stocks are cheap or expensive relative to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because the market valuation is high. Still, we advise investors to be circumspect about adding new positions without carefully investigating the underlying value.

Bull/Bear Market

The ASX Bull-Bear Market indicator remains at 56%, from 66% two weeks ago. Four indicators from Australia and China indicate risk-on, with a 60% weighting, while the US Bull/Bear indicator has a 40% weighting.

ASX Bull-Bear Market Indicator

The ASX 200 index has been in a downtrend relative to gold (measured in AUD) for four years, and shows no sign of changing.

ASX 200/ Gold in AUD

Stock Pricing

ASX stock pricing increased to 90.09 percent, compared to a high of 92.23 percent in August and a low of 67.85 percent in April.

ASX Stock Market Value Indicator

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

Conclusion

The ASX bull-bear indicator reflects a mild bear market, while extreme valuation increases the long-term risk of a significant drawdown.

Acknowledgments

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Better Buckle Up

Key Points

  • Bitcoin broke through the band of support at 110K, warning of a correction.
  • The secured overnight financing rate (SOFR) spiked above the interest rate paid on reserve balances at the Fed, warning of a sharp contraction in liquidity in financial markets.

Better buckle up. Bitcoin serves as the canary in the coal mine for financial markets.

A breach of the band of support between 108K and 110K warns of a correction that is likely to spread to major stock indices such as the Nasdaq and S&P 500.

Bitcoin (BTC)

The S&P 1500 Regional Banks Index fell sharply this week as markets were spooked by three large defaults, which appear to involve fraudulent disclosure. A peak below the 50-day weighted moving average and a Trend Index peak below zero both warn of selling pressure.

S&P 1500 Regional Banks Index

This week everyone is beared up on regional banks (again). Zions lost $50mn on a loan. A loan equal to 0.08% of their loan book. Yes, less than 0.1%. There have been a series of fraudulent loans uncovered and investors are worried these are signs of a bigger problem. The cockroach metaphor.

Yes, it’s scary for 3 fraudulent loans to come up all at once (Tricolor, First Brands and the Zions loan), but rather than it being a systemic problem is it possible that after the Tricolor loan went bad, every bank immediately began scrubbing every loan for irregularities and that is why these disclosures are coming up so quickly? On a practical basis it’s hard to have a systemically high level of loans be fraudulent. Possible, but hard. Bank loan underwriting has been around for a long time, and it’s pretty stringent, which is why private credit is doing so well. If you have an irregular profile and want a risky loan, go to a private credit fund, not a super regulated regional bank. (YWR)

Financial Markets

The secured overnight financing rate (SOFR) spiked to 15 basis points above the rate paid to commercial banks on their reserve balances at the Fed (IORB), indicating that large banks are reluctant to lend in the repo market despite the collateralized security.

Secured Overnight Financing Rate (SOFR) & Interest on Reserve Balance (IORB)

SOFR is the rate charged by banks on overnight borrowing secured by Treasury securities as collateral (repo).

Banks usually are comfortable lending in the repo market, and the SOFR typically trades at a discount to IORB because of the preference for high-quality UST collateral. The SOFR spike above the IORB warns that the financial markets are under stress, with a sharp contraction in liquidity as lending dries up.

The Fed will likely intervene, injecting liquidity to calm the markets, and a rate cut at the next FOMC meeting on October 28-29 is now almost inevitable.

Gold

Gold hesitated at $4,300 per ounce and will likely retrace to test support. A correction that respects support at $4,000 would signal a fresh advance with a target of $4,600.

Spot Gold

Conclusion

Be prepared for a volatile week ahead.

The Bitcoin breach of support at 110K and a spike in the secured overnight financing rate (SOFR) warn of a sharp contraction in liquidity. We expect a sharp fall in stocks unless the Fed intervenes to inject liquidity before markets open on Monday.

Acknowledgments

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US Stock Pricing at Extreme

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, and the one on the right reflects stock market valuation levels. Stock market pricing indicates whether stocks are cheap or expensive relative to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because the market valuation is high. Still, we would advise investors to be circumspect about adding new positions without carefully investigating the underlying value.

Bull/Bear Market

The Bull/Bear indicator remains at 40%, warning of a bear market ahead.

Bull-Bear Market Indicator

Updates to three market indicators (highlighted in orange) are delayed because of the US government shutdown.

The Chicago Fed National Index of Financial Conditions dropped to -0.559 on October 10, indicating a return to pandemic-era loose monetary conditions. NFCI values above zero indicate monetary tightening, while values below signal loose financial conditions.

Chicago Fed National Financial Conditions Index

Stock Pricing

Stock pricing increased to 98.45 percent, compared to a high of 98.56 percent two weeks ago, and an April low of 95.04 percent. The extreme reading warns that stocks are at long-term risk of a significant drawdown.

Stock Market Value Indicator

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

Robert Shiller’s CAPE measure reached 39.20 this week, the highest ever recorded outside of the Dotcom bubble in 1999-2000.

S&P 500 CAPE

CAPE compares the S&P 500 index to a 10-year average of inflation-adjusted earnings.

Conclusion

The bull-bear indicator at 40% warns of a bear market ahead, while extreme pricing increases the long-term risk of a significant drawdown.

Acknowledgments

Notes

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ASX Swings to Bear

Bull-Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while the indicator on the right reflects stock market valuation. Stock market pricing indicates whether stocks are cheap or expensive relative to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because the market valuation is high. Still, we advise investors to be circumspect about adding new positions without carefully investigating the underlying value.

Bull/Bear Market

The ASX Bull-Bear Market indicator retreated to 56%, from 66% last week, shifting to a mild bear market.

ASX Bull-Bear Market Indicator

The 3-month moving average of the NAB forward orders index fell below zero in September, signaling risk-off.

NAB Forward Orders & 3-Month MA

Four indicators from Australia and China now indicate risk-on, with a 60% weighting, while the US Bull/Bear indicator, with a 40% weighting, is unchanged.

Stock Pricing

ASX stock pricing eased slightly, to 89.75 percent, compared to a high of 92.23 percent in August and a low of 67.85 percent in April.

ASX Stock Market Value Indicator

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

Conclusion

The ASX bull-bear indicator has shifted to a mild bear market, while the extreme valuation increases the long-term risk of a significant drawdown.

Acknowledgments

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The Mistaken Myth of an Invincible China | Robin J Brooks

An alternative view on why China is increasing export controls on critical materials:

China this week put new export controls on rare earths and other critical minerals needed for US defense and technology production. This step drastically escalates the tariff stand-off with the US and fits neatly into the widespread narrative that China has the upper hand over the US. That narrative is nonsense….

You can read more at Robin Brooks.

Conclusion

I’m unsure how China stepping up export controls and provoking President Trump will bring tariffs down. Whether China’s actions are a sign that it has the upper hand in negotiations or not, this will likely escalate the trade war, increasing volatility in global financial markets.

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