Hey folks, we are continuing the momentum we saw closing out 2019 with markets continuing to make all time highs. Of course we must be careful in these markets but staying on the sidelines is not the answer.
Weekly Market Sound-Bites;
• The markets rolled on this past week as the targeted killing of Soleimani on Jan 3rd and the resulting Iranian missile strike did not keep the markets from making new All Time Highs…We also saw the DOW move briefly over 29K before pulling back slightly. The current S&P PE Ratio of 19.65 is around the highest it has been in 40 years. The Yield gap (S&P Earnings Yield which is Earnings over Price [opposite of PE Ratio] measures the S&P Earnings Yield vs the 10 Year US Treasury and it shows a 3.4% Gap which is inexpensive and helps channel more money into the Equity markets. The rally in 2019 was all about PE multiple expansion since earnings growth was flat to negative….
• We’ve seen since Oct 8th of 2019 the S&P has risen over 14% which was also the last day the S&P saw a close greater than + or – 1% on the day…remember that 2017 only saw 6 days all year where the S&P closed more than 1% higher or lower at close for the day…we are also seeing Volatility as measured by the VIX coming in lower and with the short interest falling over 30% in the past 60 days it should lessen the impact of any Volatility structured event in the markets…This market truly is “A Timex Market” where it just keeps taking a beating yet keeps on ticking…
• Abnormally low interest rates allow for the PE multiple expansion but in 2020 we will need to see Earnings come thru to keep prices on track for another good year. Most analysts expect the S&P to gain between 5% and 10% which would put the end of year S&P from 3425 to 3600. However, when you have a year like 2019 where with the S&P moves up 28% while Earnings are flat will make it more difficult for the US Fed manage their go-forward interest rate plans. There are essentially 3 big risks to the markets in 2020; Inflation resurfaces, China Trade Deal unwinds; -and finally the Presidential Election in November. Not counting on any geo-political event such as a war or other unknow scenario these risks will drive the 2020 market performance.
• And thus far, the US consumer is still very strong due to very low unemployment rates (lowest in 50 years) and wage inflation is essentially still held in check. It really is a two speed economy where Manufacturing is globally in a tailspin but seems to be bottoming out but well below the 50 levels (10 year lows) is seen as simply holding even year over year while the Services sector is holding above the 50 levels and still expanding…Also holding inflation in check is technology which can allow businesses to hold its revenues constant and substitute technology for labor essentially going with a “capital light” type business model. This has the impact of holding inflation levels lower than normal, especially given the current 3.5% unemployment rates.
• Currently the top 5 stocks; AAPL, MSFT, GOOGL, AMZN and FB account for over 16.7% of the total S&P weighting so in a sense, these heavily weighted tech stocks are driving the S&P bus at this time…It also is more heavily skewed with ETF holdings as well as Passive Index Funds all jumping on board. It is important to note that in 1980 there were over 11,500 publicly traded companies and today there are only 3,600 which does tend to skew results to those heavily weighted stocks.
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