While the S&P500 did not rise every day last week, it did close higher for the entire week. The index rose another 0.67% to set yet another all-time high. Once again, volume was very light, which doesn’t support the rally. But volatility retreated—the VIX index fell back and this movement does mesh with the rise in prices.
The week’s economic reports were mixed as usual—-with roughly half missing expectations and the other half beating expectations. So no change in the anemic pace of US economic growth, growth that’s been anemic ever since the Summer of Recovery began in mid-2009.
The technical picture is beginning to look like the S&P has entered a short-term parabolic blow-off top formation. Ever since Donald Trump won the election, the hopes and expectations of lower taxes and lower corporate regulations have driven stock prices higher at a rate that has been steeper than most other bursts since this market bottomed in early 2009. And all this, despite any concrete plans or details to support the hopes that these Trump initiatives will actually take effect anytime in the near future. So the S&P500 is now even more over-stretched than it’s been in many years.
More importantly, valuations—the driver of long term returns in stock markets—continue to move higher into nosebleed levels. Long time money manager John Hussman describes the situation this way:
“…the consensus of the most reliable equity market valuation measures we identify (those most tightly correlated with actual subsequent S&P 500 total returns in market cycles across history) advanced within 5% of the extreme registered in March 2000. Recall that following that peak, the S&P 500 did indeed lose half of its value, the Nasdaq Composite lost 80% of its value, and the tech-heavy Nasdaq 100 Index lost an oddly precise 83% of its value. With historically reliable valuation measures beyond those of 1929 and lesser peaks, capitalization-weighted measures are essentially tied with the most offensive levels in history. Meanwhile, the valuation of the median component of the S&P 500 is already far beyond the median valuations observed at the peaks of 2000, 2007 and prior market cycles, while our estimate for 10-12 year returns on a conventional 60/30/10 mix of stocks, bonds, and T-bills fell to a record low last week, making this the most broadly overvalued moment in market history”
Think carefully about what he just pointed out. the S&P500 is nearing 2000 bubble highs, the most overvalued point in the history of the S&P! The S&P is already more overvalued than it was in 1929, before the crash that preceded the Great Depression. And you use median valuations, then the S&P is already way more overvalued than it was in the 2000 peak when the overvaluation was driven by relatively few tech firms.
And now interest rates are rising and the Fed has signaled that it will hike rates three times this year.
Super high valuations and rising rates have ALWAYS preceded major (not minor ) stock market corrections. Perhaps this time will be different.