Stocks are growing increasingly bullish, after strong earnings results for the last quarter, with the S&P 500 closing above 5000 for the first time.
Even small caps are growing increasingly bullish, with the Russell 2000 ETF (IWM) testing resistance at 200. Breakout would signal that the current narrow advance is broadening.
The Price-to-Sales ratio remains elevated, at 2.56, warning of long-term reversion towards the mean at 1.70.
Sales growth improved slightly to 5.2% for the December quarter, compared to December 2022. But this is before inflation; so real growth remains low.
Operating margins shrunk to 10.7%, with 75.6% of corporations having reported, from earlier estimates of 11.0%.
Treasury Market
Ten-year Treasury yields are testing resistance at 4.20%. Breakout would offer a target of 4.60% — a bear signal for stocks.
The 2-year Treasury yield — normally a reliable leading indicator of the Fed funds rate — is currently rising, warning that Fed rate cuts are likely to remain on pause for longer.
The long-term challenge facing Treasury is the rising projected budget deficits, with debt likely to grow at a faster pace than GDP. CBO projections vastly understate the likely deficit as Brian Riedl explains below:
Gold & the Dollar
The Dollar Index retraced to test support at 104 but is greatly influenced by the direction of the Fed funds rate and Treasury yields.
Gold is ranging between $2000 and $2055 per ounce. The lower close at $2024 suggests another test of support at $2000.
2023 is the first time that the gold price has kept rising while ETF gold holdings are falling. Cause of the divergence is believed to be strong central bank purchases over the past 12 months.
Conclusion
The S&P 500 is vastly overpriced when we compare the current price-to-sales ratio of 2.56 to its long-term average of 1.70. Sales growth is also falling, while operating margins are shrinking. Investors seem to have tunnel vision, focused on rising prices rather than underlying fundamentals.
Long-term yields are rising, with the Fed expected to postpone rate cuts until mid-year, which is bearish for stocks.
Federal deficits are expected to grow to $3.6 trillion by 2034, warning of rising inflationary pressure and higher Treasury yields. The Fed may suppress long-term yields but that is likely to increase inflationary pressure even more.
The short-term outlook for Gold is bearish — if long-term yields rise — but the long-term outlook is strongly bullish because of expected rising inflation and central bank purchases.
Acknowledgements
- Luke Gromen, FFTT: February 9, 2024
- Brian Riedl, Manhattan Institute
- S&P Global Indices: S&P 500 Index Earnings
