INVESTORS ARE CONFIDENT: Towards the end of July, investors were frightened by a drumbeat of data suggesting a global slowdown. U.S. stock prices fell and then bobbed around in a tight range. Since then, the Federal Reserve has lowered interest rates, U.S. consumer spending and jobs data has come in strong, and corporate profits have beaten expectations. Fears of a looming downturn have subsided for now and stock prices are hitting new records again.
BEAR MARKET SIGNALS NOT HERE YET: There are eighteen classic signals that economists watch as signals of a looming bear market. In March of 2000, 17.5 of the 18 were flashing red as signals of a looming bear market. In October of 2007, thirteen of the eighteen were in red territory. Currently, four of the eighteen are in negative territory. (Source, Citi Research, Eventide Macro Update Digest, November 7, 2019).
THE NEGATIVE YIELD CURVE: We heard a lot about the negative yield curve recently, and how it is a precursor to recessions. The ten year/two year treasury yield inverted for three days. From 1980 to the present, the number of days of inversion preceding a recession has averaged 247.
BUT ARE U.S. STOCKS OVERVALUED?: S&P 500 stocks prices are currently above historic valuation averages by most measures. The average trailing price to earnings ratio (from 1960) is 16.2. That figure is currently 18.2, or 12% above average. The average forward consensus price to earnings ratio from 1986 to the present has been 15.3. That figure is now ten percent higher at 16.8. Another valuation metric is the price to free cash flow metric. From 1986 to the present, the average has been 28. That figure is now 23.7, or 15% below average.