After stalling the prior week, the S&P500 resumed its partying ways by climbing a massive 3% last week. Volume was moderate (lower than in the prior week when the index retreated). And volatility was essentially flat—the VIX index dipped slightly but since it was already near yearly lows, it didn’t have much room to fall.
US economic reports were mostly poor last week. PMI services fell from the prior month’s reading. International trade missed expectations by being more negative than economists had predicted. Productivity rose less than expected; this is very important because productivity growth is a critical determinant of long-term economic growth (ie GDP growth). Also related to poor productivity growth (lower productivity growth translates to higher unit labor costs) is unit labor cost which rose far more than expected; this clearly hurts corporate profits. Consumer credit rose less than expected. Initial jobless claims once again disappointed. On the positive side, ISM services beat consensus estimates. And consumer sentiment also rose more than predicted.
Technical analysis of the S&P500 still points to a market that extremely overbought. This is true both on the daily and the weekly charts which makes the technical argument stronger than if the overbought condition existed only on one time resolution (eg. the daily charts but not the weekly charts).
Speaking of overbought conditions in the US stock market, last week Nobel prize winner and Yale professor Robert Shiller commented on CNBC that his famed Shiller PE Ratio (current price of the S&P divided by the average of the last 10 years of S&P earnings) was reaching the levels last seen in 1929 and 2007……both times when the US stock markets went on to crash in spectacular fashion. While the Shiller PE today is still lower that it was in early 2000 at the height of the dotcom bubble, Shiller is suggesting based on 100 years of data with his indicator that buying stocks now may not generate much, if any, returns to stock investors over the next 10 years.
Shiller is the first to admit that his indicator cannot predict the timing of a major equity market retreat, and that the US stock market may move even higher in the short run (especially in investor “animal spirits” drive them higher). But he is reminding everyone who will listen, that the evidence is simple yet blunt—that if investors buy stocks when prices are extremely high, then they should not expect to make a lot of money in the long run.