Last week saw another melt up in US stock prices with the S&P500 registering a 1.49% increase by the end of trading on Friday. Volume was light, a reflection of the normally slower summer trading season as well as the fact that new investors are still not rushing in to chase this market higher. Volatility, as measured by the VIX index, dropped back down to the lows of the year. So the entire Brexit fall-out has been entirely ignored as far as US equity prices go. Not only does the S&P think Brexit will not hurt equity prices, but judging by the new all-time highs set last week, the S&P believes that it will be a positive for risk asset markets. How? Once again, the S&P500 is anticipating that any bad news from Brexit will be met with good news from central banks, in the form of even more expansionary monetary policies. So bad news is good news.
In the real economy, the labor market conditions index fell once again. Job openings, as measured by the JOLTS report, also fell. Wholesale trade missed. Initial jobless claims were better than expected. While producer prices were a bit hotter than predicted, consumer prices were lower. Retail sales and industrial production beat consensus estimates. But the Empire State manufacturing survey and consumer sentiment both missed. So once again, there is no notable uptick in the pace of growth in the US economy; it continues to muddle along.
Technically, the S&P500 is now extremely overbought. Both on the daily and the weekly charts, prices are hugging the upper Bollinger bands. And prices are now far above—stretched above—the 200 day moving average.
More importantly, some highly respected Wall Street firms are starting to voice concerns about more fundamental valuation measures. Goldman Sachs, for example, has just issued a report where is notes that “Valuations are already at historical extremes. The S&P500 trades at a forward P/E of 17.6x, ranking in the 89th percentile since 1976. At 18.4, the median constituent ranks in the 99th percentile. Most other metrics such as P/B, EV/EBITDA, and EV/Sales paint a similar picture.”
So here is one of Wall Street’s most respected firms, a firm that normally champions rising stock markets because they’re good for business, now expressing deep concerns.
So anyone who decides to cast aside such simple, historically informed data and put new money into US stock markets should understand that they will be picking up nickels in front of a steam roller. It’s good while it lasts, but when it ends, the effects will be catastrophic.