Category: Countries & Regions

Posted on

US bear market and extreme valuations

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, but we would advise investors to be circumspect about adding new positions without careful investigation of the underlying value.

Bull/Bear Market

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

Bull-Bear Market Indicator

The Chicago Fed National Financial Conditions Index declined to -0.567, indicating loose monetary conditions that will likely support stock prices.

Chicago Fed National Financial Conditions Index

However, heavy truck sales are falling, reflecting industry concerns that economic activity is slowing.

Heavy Truck Sales

Stock Pricing

Stock pricing eased to 98.27 percent, from a new high of 98.32 percent last week, 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 ratio for the S&P 500 is at its highest ever level (39.20) outside of the 2000 Dotcom bubble.

Robert Shiller's CAPE Ratio

CAPE compares the current index value to a ten-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

Posted on

ASX mildly bullish but extreme valuation

Bull-Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while the gauge 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, but we would advise investors to be circumspect about adding new positions without careful investigation of the underlying value.

Bull/Bear Market

The ASX Bull-Bear Market indicator remains at 66%, compared to 56% four weeks ago, signaling a mild bull market.

ASX Bull-Bear Market Indicator

Five of six indicators from Australia and China indicate risk-on, while the ASX 200 relative to Gold (in AUD) remains risk-off. The composite index includes a 40% weighting for the US Bull/Bear indicator, which is also unchanged.

The ASX 200 index has been in a bearish decline relative to gold (in Australian dollars) since December 2021.

ASX 200 Index/Gold in AUD

Stock Pricing

ASX stock pricing retreated to 89.20 percent, compared to a high of 92.23 percent six weeks ago 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 signals a mild bull market. However, the extreme valuation increases the long-term risk of a significant drawdown.

Acknowledgments

Posted on

ASX Stock Pricing still Extreme

Bull-Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while the gauge 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, but we would advise investors to be circumspect about adding new positions without careful investigation of the underlying value.

Bull/Bear Market

The ASX Bull-Bear Market indicator remains at 66%, compared to 56% two weeks ago, signaling a mild bull market.

ASX Bull-Bear Market Indicator

Five of six indicators from Australia and China indicate risk-on, while the ASX 200 relative to Gold (in AUD) remains risk-off. The composite index includes a 40% weighting for the US Bull/Bear indicator, which is also unchanged.

The ASX 200 index has been in a bearish decline relative to gold (in Australian dollars) since December 2021.

ASX 200 Index/Gold in AUD

Stock Pricing

ASX stock pricing retreated to 90.42 percent, compared to a high of 92.23 percent five weeks ago 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.

The 20% trimmed mean of ASX 20 forward price-earnings ratios has climbed to an extreme 23.15.

20% Trimmed Mean of ASX 20 Forward PE's

Conclusion

The ASX bull-bear indicator signals a mild bull market. However, extreme valuations increase the long-term risk of a significant drawdown.

Acknowledgments

Posted on

US Stock Valuations Reach a 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, but we would advise investors to be circumspect about adding new positions without careful investigation of the underlying value.

Bull/Bear Market

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

Bull-Bear Market Indicator

The Fed resumed rate cuts, with the fed funds target rate now 4.0% to 4.25%, and a mid-point of 4.125%. The downward cycle warns of a bear market.

Fed Funds Target Rate Mid-point

However, the Chicago Fed National Financial Conditions Index declined to -0.558, indicating loose monetary conditions that will likely support stock prices.

Chicago Fed National Financial Conditions Index

Stock Pricing

Stock pricing increased to a new high of 98.32 percent, compared to the 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.

Warren Buffett’s favorite stock market valuation indicator, market capitalization climbed to a new all-time high of 2.84 times GDP in the second quarter, more than double the long-term average (since 1974) of 1.175.

Stock Market Capitalization/GDP

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

Posted on

Powell walks the tightrope with the latest FOMC decision

Key Points

    • The Fed cut rates by 25 basis points, with two more expected this year.
    • There is no change to the rate of Fed balance sheet runoff (QT).
    • FOMC dot plot projections reflect a mildly dovish long-run monetary policy, but not sufficient to antagonize the bond market.

Chair Jerome Powell announced a 25 basis-point cut in the fed funds target rate. The Target range for the federal funds rate is now 4.0%-4.25%.

There was only one dissent, from new Trump appointee Stephen Miran, who wanted a 50 basis point cut.

What’s new in the FOMC statement:

Recent indicators suggest that growth of economic activity moderated in the first half of the year.

Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.

FOMC economic projections reflect a broadly balanced economy, with unemployment rising slightly to 4.5% before easing to 4.2% in the long run. Real GDP growth is expected to slow to 1.6% in 2025, increasing to 1.8% in the long run. Median PCE inflation is projected to remain at 3.0% for 2025 before easing to 2.0% in the long run.

FOMC Projections

Dot Plot projections of the fed funds rate center around another two rate cuts of 25 basis points this year, with one outlier — possibly Miran — projecting five rate cuts.

Fed Funds Rate Projections (the Dot Plot)

Financial Markets

Financial markets already display signs of loose monetary conditions, with the Chicago Fed NFCI index falling to -0.558 for the week ended September 5.

Chicago Fed National Financial Conditions Index

Treasury Markets

10-year Treasury yields rallied off support at 4.0% on a less-dovish-than-expected FOMC projection.

10-Year Treasury Yield

Dollar & Gold

The US Dollar Index likewise found support on the prospect of higher-than-expected interest rates.

Dollar Index

Gold retraced to test support at $3,650 per ounce.

Spot Gold

Conclusion

The Fed cut 25 basis points as expected, with Chair Jerome Powell doing just enough to placate President Trump without caving to political pressure.

Dot plot projections reflect two more rate cuts of 25 basis points this year. The median fed funds rate of 3.0% is slightly higher than expected long-run inflation at 2.0%. The resulting real fed funds rate of 1.0% is somewhat dovish but not outright stimulatory. The Trump administration wants to run the economy hot, with higher inflation, to solve the fiscal debt crisis. At the same time, a negative real rate would antagonize the bond market and likely cause an upsurge in long-term yields.

Fed Chair Powell has skillfully negotiated a path between the bond market preference for higher real rates and the Trump administration’s demands for monetary stimulus. Antagonizing either group would risk a bond market revolt, the latter because it would invite increased Trump interference and possible dismissal of Powell “without cause.”

We do not expect the outcome to affect the secular uptrend in long-term Treasury yields, the dollar’s downtrend, or gold’s uptrend.

Acknowledgments

Posted on

US Stocks Reach New Valuation 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, but we would advise investors to be circumspect about adding new positions without careful investigation of the underlying value.

Bull/Bear Market

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

Bull-Bear Market Indicator

The unemployment rate and continued claims are gradually rising, indicating the US economy is slowing rather than the dramatic collapse suggested by recent BLS job growth revisions.

Continued Claims & the Unemployment Rate

Stock Pricing

Stock pricing increased to a new high of 98.19 percent, compared to the 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 S&P 500 is at a precarious 25.4 times projected earnings, a level only exceeded during the Dotcom bubble in 2000.

S&P 500 Forward Price-Earnings Ratio

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

Posted on

Forward Orders Lift ASX to Mild Bull Signal

Bull-Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while the gauge 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, but we would advise investors to be circumspect about adding new positions without careful investigation of the underlying value.

Bull/Bear Market

The ASX Bull-Bear Market indicator jumped to 66%, compared to 56% last week, with NAB forward orders crossing to a risk-on signal.

ASX Bull-Bear Market Indicator

Five of six indicators from Australia and China now indicate risk-on, while the ASX 200 relative to Gold (in AUD) remains risk-off. The index includes a 40% weighting for the US Bull/Bear indicator, which is unchanged.

NAB forward orders for Australia increased to 1.0 in August from 0 in the preceding two months, lifting the 3-month moving average above zero and signaling risk-on for the first time since October 2023.

Australia: NAB Forward Orders & 3-Month MA

Stock Pricing

ASX stock pricing increased to 91.37 percent, compared to a high of 92.23 percent four weeks ago 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.

The All Ordinaries dividend yield fell to 3.12%, a level typical of recessions like 1987 and 2020, when falling earnings force dividend cuts. Dividends are reasonably healthy at present, suggesting that valuations are extreme.

All Ordinaries Dividend Yield

Conclusion

The ASX bull-bear indicator has lifted to 66%, signaling a mild bull market. However, extreme valuations increase the long-term risk of a significant drawdown.

Acknowledgments

Posted on

Stay out of Tech Stocks | Julian Brigden

Maggie Lake interviews Julian Brigden, co-founder of MI2 Partners, about his fears for tech stocks, the AI bubble, US exceptionalism, the telegraphed rate cuts, and why people are ignoring hard asset outperformance.

[Length: 38:00]

Here is the XLK (S&P Technology SPDR) relative to XME (S&P Metals & Mining SPDR) that Julian refers to:

S&P Technology SPDR/S&P Metals & Mining SPDR

Posted on

Douglas Holtz-Eakin on Tariffs

Douglas Holtz-Eakin was Director of the Congressional Budget Office and Chief Economist of the Council of Economic Advisers under George Bush. His view on tariffs is that they are a tax paid by US corporations and consumers, and if you raise taxes, growth will suffer.

[Length: 6:30]

Posted on

Bond yields and the dollar fall as gold reaches a new high

Key Points

  • Long-term Treasury yields are falling steeply in anticipation of more Fed rate cuts as the economy slows.
  • The S&P 500 is retracing to test short-term support at 6500.
  • Financial market liquidity remains strong, supporting stocks.
  • The dollar is weakening, and gold and silver soared to new highs.

10-year Treasury yields fell to 4.046% testing the long-term band of support between 4.0% and 4.1%.

10-Year Treasury Yield

Expectations of steeper Fed rate cuts grow as more evidence emerges of a slowing economy. The Cass Freight Index is in a strong downtrend, and a fall below 1.0 would signal a recession. A useful barometer of economic activity, the index measures the number and cost of freight shipments across North America based on data from hundreds of large shippers.

Cass Freight Index

The current turmoil over tariffs — after the US Appeals court overruled Donald Trump’s “reciprocal” tariffs and his earlier “fentanyl” tariffs against China, Canada, and Mexico — will likely cause a sharp contraction in capital investment due to the uncertainty, almost guaranteeing a recession. Trump has lodged an appeal with the Supreme Court, but a decision is unlikely before next year. Unless he can get a stay on the lower court’s ruling, Treasury will be forced to fund the billions of dollars in tariffs collected.

While some believe that overturning the tariffs would cause a blowout in the fiscal deficit, we believe that the promise of a boost in revenue from tariffs was more spin than substance. There are no free lunches in economics; when something looks too good to be true, it usually is. Most of the cost of tariffs is currently borne by US corporations, but will likely be pushed onto consumers through price increases over the next year.

Goldman Sachs: Estimated Incidence of Tariff Costs

Where corporations do not pass on tariffs to customers, their profits and corporate tax paid to the Treasury will decline. Falling profits also hurt stock prices, reducing capital gains taxes. US consumers and corporations will directly or indirectly pay for the tariffs, and the impact on net Treasury receipts will likely be marginal.

Our biggest concern is not the loss of tax revenues, but the economic impact of policy uncertainty.

Stocks

The S&P 500 is retracing to test its latest support level at 6500, but rising Trend Index troughs indicate buying pressure, and respect of support will likely signal a further advance.

S&P 500

The equal-weighted S&P 500 ($IQX), more representative of large caps than the headline index, tests similar support at 7600. Rising Trend Index troughs again indicate buying support and likely continuation of the uptrend.

S&P 500 Equal-Weighted Index

Financial Markets

High-yield bond spreads are declining, indicating the return of loose financial conditions supporting high stock prices.

Junk Bond Spreads

Bitcoin (BTC) respected support at 110K, further indicating easing financial conditions — a bullish sign for stocks.

Bitcoin (BTC)

Dollar & Gold

The dollar is weakening in line with the outlook for interest rates. A US Dollar index breach of the long-term band of support between 96.5 and 97 would strengthen our long-term target of 90.

Dollar Index

Gold closed at a new high of $3,645 per ounce, while rising Trend Index troughs signal buying pressure. Expect a retracement to test support between $3,500 and $3,600, but respect will likely confirm an advance to $4,000 by the end of the year, as the dollar weakens.

Spot Gold

Silver is testing resistance at $41.50 per ounce. Again, we expect a retracement followed by a further advance, with a target of $44.

Spot Silver

Energy

Brent crude held steady at close to $66 per barrel after the OPEC+ meeting on the weekend decided on a smaller-than-expected initial increase in production of 137,000 barrels per day, in a phased unwinding of the 1.66 million barrels per day post-COVID production cut.

Brent Crude

Conclusion

Cyclical pressures are driving long-term yields lower, with a slowing economy likely to cause steeper-than-expected Fed rate cuts. Added uncertainty over tariffs increases the risk of a recession.

Loose financial conditions, boosted by falling Treasury yields, support stock prices, but a slowing economy would be bearish for earnings.

The dollar is weakening in response to the expected fall in interest rates, and a US Dollar Index breach of support between 96.5 and 97 would strengthen our long-term target of 90.

We expect gold and silver to rise as the dollar weakens, with respective targets of $4,000 and $44 per ounce by the end of the year.

 

Acknowledgments

Powered by WordPress / WordPress Maintenance Service By Website Helper