After dipping the prior week, the S&P500 resumed its recent bounce and rose a strong 1.7% last week. Volume was very light, but once again this was due more than anything else to the holiday season and reduced number of trading days At the same time, stock market volatility dropped even further, this time roughly matching the lows reached in the normally super complacent summer months.
In US macro news, the results were mixed to weak. While PMI manufacturing rose a bit from last month, and ISM manufacturing beat expectations, most other reports were disappointing. Mortgage applications—for both refinancings and purchases—dropped again. The ADP employment report missed, fairly badly. PMI services also fell. International trade was worse than expected. Factory orders missed. And the big report of the week—payrolls—was disappointing. Fewer jobs were created than economists had predicted. While average hourly earnings rose, the average workweek fell. Also disappointing was the labor force participation rate which showed no signs of improvement; instead, it’s still hovering near multi-decade lows.
Technical analysis continues to show an extremely over-stretched stock market. Prices are literally moving up an off the charts…..on both the daily and weekly resolutions.
But that would be OK if valuations were not so obscenely….when viewed by historical comparisons….high. For example, in the S&P500 the enterprise value of all businesses divided by their total earnings before interest and taxes (EV/EBIT) is now as high—or higher—than it was during the tech bubble!
Yet investors continue to buy, buy, buy….clearly with the implied expectation that regardless of today’s obscenely high values future valuations will climb even higher. In short, most stock market investors have now succumbed to the greater fool theory—-primarily based on the fact that this theory has seemed to work over the last couple of years and also because everyone can point to the still very accommodating monetary policies of the Federal Reserve.
Clearly, these investors have forgotten the fact that the greater fool theory never works forever. Also, these investors are ignoring the fact that not only has the Fed already raised rates twice in this cycle, but it has signaled that it will be raising them three more times later this year.
Surely, most of these investors know fully well what they’re doing—they’re picking up free nickels in front of a deadly steamroller. And they’ll all be able to get out of the stock markets just before any serious selling begins…if it ever even begins.