{"id":19590,"date":"2019-12-20T10:13:39","date_gmt":"2019-12-20T10:13:39","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=19590"},"modified":"2019-12-20T10:21:00","modified_gmt":"2019-12-20T10:21:00","slug":"how-is-the-current-sp-500-rise-likely-to-end","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2019\/12\/20\/how-is-the-current-sp-500-rise-likely-to-end\/","title":{"rendered":"What is causing the current S&P 500 rise and how is it likely to end?"},"content":{"rendered":"

In November 2007, six months after the inverted yield curve (3M-10Y) recovered to a positive slope, bellwether transport stock Fedex broke primary support at 100<\/a> to warn of an economic slow-down.<\/p>\n

Today, two months after rate cuts restored an inverted yield curve to positive, Fedex again broke primary support, this time at 150. Their CEO observed that the stock market might be booming but the “industrial economy does not reflect any growth at all.”<\/p>\n

\"Fedex\"<\/p>\n

Real GDP growth is slowing, with our latest estimate, based on weekly hours worked, projecting GDP growth of 1.5% for the calendar year.<\/p>\n

\"Real<\/p>\n

While real corporate profits are declining.<\/p>\n

\"Corporate<\/p>\n

What is keeping stocks afloat?<\/h2>\n

First, a flood of new money from the Fed. They expanded their balance sheet by $375 billion since September 2019 and are expected to double that to $750 billion\u00a0\u2014 bringing total Fed holdings to $4.5 trillion by mid-January \u2014 to head off an expected liquidity crisis in repo and FX swap markets. The red line below shows expansion of the Fed’s balance sheet, the blue is the S&P 500 index.<\/p>\n

\"S&P<\/p>\n

Second, ultra-low bond yields have starved investment markets of yield, boosting earnings multiples. P\/E of historic earnings rose to 22.01 at the end of the September quarter and is projected to reach 22.82 in the December quarter (based on current S&P earnings estimates).<\/p>\n

\"S&P<\/p>\n

That is significantly higher than the peak earnings multiples achieved before previous crashes \u2014 18.86 of October 1929 and 18.69 in October 1987 \u2014 and is only surpassed by the massive spike of the Dotcom bubble.<\/p>\n

How could this end?<\/h2>\n

First, if the Fed withdraws (or makes any move to withdraw) the $750 billion temporary liquidity injection, intended to tide financial markets over the calendar year-end, I expect that the market would crash within minutes. They are unlikely to be that stupid but we should recognize that the funding is permanent, not temporary.<\/p>\n

Second, if bond yields rise, P\/E multiples are likely to fall. 10-Year breakout above 2.0% would signal an extended rise in yields.<\/p>\n

\"10-Year<\/p>\n

China has slowed its accumulation of US Dollar reserves, allowing the Yuan to strengthen against the Dollar (or at least weaken at a slower rate). Reduced Treasury purchases are causing yields to rise. The chart below shows in recent months how Treasury yields have tracked the Yuan\/US Dollar (CNYUSD) exchange rate.<\/p>\n

\"CNYUSD\"<\/p>\n

Accumulation of USD foreign exchange reserves (by China) is likely to be a central tenet of US trade deal negotiations \u2014 as they were with Japan in the 1985 Plaza Accord. Expect upward pressure on Treasury yields as growth in Chinese holdings slows and possibly even declines.<\/p>\n

Third, and most importantly, are actual earnings. With 98.6% of S&P 500 companies having reported, earnings for the September quarter are 6.5% below the same quarter last year. Poor Fedex results and low economic growth warn of further poor earnings ahead.<\/p>\n

We maintain our view that stocks are over-priced and that investors need to exercise caution. We are over-weight cash and under-weight equities and will hold this position until normal P\/E multiples are restored.<\/p>\n","protected":false},"excerpt":{"rendered":"

In November 2007, six months after the inverted yield curve (3M-10Y) recovered to a positive slope, bellwether transport stock Fedex broke primary support at 100 to warn of an economic slow-down. Today, two months after rate cuts restored an inverted yield curve to positive, Fedex again broke primary support, this time at 150. Their CEO … <\/p>\n

Continue reading “What is causing the current S&P 500 rise and how is it likely to end?”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,46,3761,34],"tags":[831,4150,1362,3766,2750,4175,3010],"class_list":["post-19590","post","type-post","status-publish","format-standard","hentry","category-the-fed-banks-interest-rates","category-deficit-spending-employment","category-gdp-and-activity","category-us-canada-countries-regions","tag-corporate-profits","tag-fed-balance-sheet","tag-fedex","tag-pemax","tag-price-earnings-ratio","tag-repo-operations","tag-sp-500"],"yoast_head":"\nWhat is causing the current S&P 500 rise and how is it likely to end? - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What is causing the current S&P 500 rise and how is it likely to end? - the patient investor\" \/>\n<meta property=\"og:description\" content=\"In November 2007, six months after the inverted yield curve (3M-10Y) recovered to a positive slope, bellwether transport stock Fedex broke primary support at 100 to warn of an economic slow-down. 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Optimism over improved global trade has spread, with the DJ Euro Stoxx 600 breaking resistance at 400. South Korea's KOSPI completed a double-bottom reversal to signal an up-trend. And India's\u2026","rel":"","context":"In "Deficit Spending & Employment"","block_context":{"text":"Deficit Spending & Employment","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/deficit-spending-employment\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":17693,"url":"https:\/\/thepatientinvestor.com\/index.php\/2018\/12\/22\/significant-divergence\/","url_meta":{"origin":19590,"position":1},"title":"Significant divergence","author":"Colin Twiggs","date":"December 22, 2018","format":false,"excerpt":"Market commentators are sifting through the data, looking for reasons to explain the sharp sell-off in stocks over the last two months. But everything they examine is likely to be shaded by their bear-tinted spectacles after the S&P 500 broke primary support at 2550. The Nasdaq 100 also broke primary\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":19819,"url":"https:\/\/thepatientinvestor.com\/index.php\/2020\/02\/22\/sp-500-freight-and-manufacturing-slow-but-housing-lifts\/","url_meta":{"origin":19590,"position":2},"title":"S&P 500: Freight and manufacturing down but housing up","author":"Colin Twiggs","date":"February 22, 2020","format":false,"excerpt":"An engulfing candle on the weekly S&P 500 chart, together with a lower peak on the Trend Index, both warn of short-term selling pressure. Reversal below 3320 would suggest another test of 3200. But the index remains in a strong primary up-trend. A long-term (log-scale) chart shows how far the\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":18544,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/07\/13\/rate-cuts-and-buybacks-the-emperors-new-clothes\/","url_meta":{"origin":19590,"position":3},"title":"Rate cuts and buybacks – the emperor’s new clothes","author":"Colin Twiggs","date":"July 13, 2019","format":false,"excerpt":"The interest rate outlook is softening, with Fed chairman Jerome Powell hinting at rate cuts in his Wednesday testimony to Congress: \"Our baseline outlook is for economic growth to remain solid, labor markets to remain strong and inflation to move back over time.\" but.... \"Uncertainties about the outlook have increased\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":36038,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/08\/01\/negative-yield-curves-and-market-timing\/","url_meta":{"origin":19590,"position":4},"title":"Negative yield curves and market timing","author":"Colin Twiggs","date":"August 1, 2022","format":false,"excerpt":"The 10-Year\/3-Month Yield Differential is plunging towards zero. An inverted yield curve is one of the most reliable indicators of a coming recession. The 10-Year\/2-Year is already below zero but is less reliable. We prefer using the 3-Month T-Bill rate as it is a more accurate indication of Fed monetary\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"10-Year\/2-Year Yield Differential","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-08-01-10y3m-yielddiff.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-08-01-10y3m-yielddiff.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-08-01-10y3m-yielddiff.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":18719,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/08\/17\/approaching-stall-speed\/","url_meta":{"origin":19590,"position":5},"title":"Approaching stall speed","author":"Colin Twiggs","date":"August 17, 2019","format":false,"excerpt":"With 89.7% of companies having reported, S&P are projecting 4.4% earnings growth for June quarter 2019 compared to the second quarter in 2018. Even more interesting is their projection of 3.4% growth for the September quarter. With EPS growth boosted by a stock buyback yield of 3.5%, this warns that\u2026","rel":"","context":"In "GDP and Activity"","block_context":{"text":"GDP and Activity","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/gdp-and-activity\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/19590","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=19590"}],"version-history":[{"count":3,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/19590\/revisions"}],"predecessor-version":[{"id":19593,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/19590\/revisions\/19593"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=19590"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=19590"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=19590"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}