The US stock market is overpriced and set up for a steep declines as the global economy weakens.
The Q-2 earnings season, which starts this week, will be weak, and will lead companies to focus on their debt instead of planning new rounds of supportive stock buybacks.
The October issue of his Credit Strategist newsletter noted, “Those who still own the more speculative parts of the market like biotech and social media should get out while you can.”
The S&P 500 Index of the biggest publicly listed companies hit a record of 2,135 on 21 May before sliding by 12.4% 3 months later as Crude Oil prices weakened and participants worried about China’s economic health.
The Shiller cyclically adjusted price-to-earnings ratio, a measure of how expensive stocks are compared with their profitability, fell from 27X to 24.7X. That is still above the long-term mean of 16.6X, showing that stocks are expensive and could decline more.
Emerging-market countries are losing steam, including China, which has the second-biggest economy after the US. The official manufacturing Purchasing Managers’ Index in China, a Key indicator of factory conditions, rose slightly to 49.8 in September from 49.7, but readings below 50 indicate a contraction.
The market’s direction will depend on the credibility of the US Fed and other central banks. Fed Chairwoman Janet Yellen said hikes in interest rates are coming this year as the labor market improves, but that was before the weak NFPs report on 2 October that showed the US economy added fewer jobs than forecast. Meanwhile, the Fed’s preferred measure of inflation is well below the unofficial target of 2%.
The Fed has undertaken several QE (quantitative easing) programs to buy trillions of dollars of government and mortgage debt to help keep rates low.
Lower interest rates make it cheaper to borrow, which can help to boost spending and investment, so far not much of that happened.
The Fed faces the real possibility that it will have to resort to more QE rather than raise rates. Brave talk aka Jawboning, by Ms. Yellen and her colleagues that markets should expect a rate increase by year-end grow dim.
Participants need to watch the value of the USD in relation to other currencies. The USD has strengthened since Y 2014 with the expectation that the Fed would raise interest rates, limiting the money supply.
The USD is the most important financial instrument in the world and participants should focus on it intently with respect to their investments, they should continue to buy Gold and grow cash savings.
The Bad-is-Good dynamic
Monday’s buying, was not fueled by Quarterly earnings as the 1st earnest lot of the reporting frame is still 2 weeks away. The rally was a continuation of the Friday’s action, was predicated on the belief that a disappointing September NFPs report would prevent the Fed from raising rates at the October meeting.
DJIA +304.06 at 16776.43, NAS 100 +73.49 at 4781.26, S&P 500 +35.68 at 1987.04
Volume: trade was above average with more than 1-B/shares exhanging hands on the NYSE
- NAS 100 +1.0% YTD
- S&P 500 -3.5% YTD
- Russell 2000 -5.3% YTD
- DJIA -5.9% YTD