Valuation

Old timers will recognize our title as a twist on Ronald Reagan’s clincher in the final 1980 presidential debate with Jimmy Carter.

We recalled Reagan’s line while preparing for today’s 40th anniversary of the great 1982 secular stock-market low. Investors in the S&P 500 have earned an annualized total return of +12.4% since that trough, about two percentage points above the long-term average.

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July’s surge drove the yellow metal to the brink of its overvaluation threshold, where only 150 ounces of gold are required to buy the median-priced existing home (currently about $299,000). Impressively, gold made all but the last month of this move without attracting mainstream attention.

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For sector overweight/underweight decisions, applying a Momentum overweight with both EM and DM countries has been most successful.

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Different measures of value may tell different stories. Using various metrics, we examine the valuation of Large Caps, Small Caps and equity sectors.

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The S&P 500 and NASDAQ Composite moved to new bull market highs in early September, but our quantitative work continues to warn there’s a least a short-term speed bump ahead for the stock market.

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While the lagging action of Small Caps should be monitored, persistent strength in most stock market breadth measures makes it difficult to argue the stock market has entered a true “distribution” phase.

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Stocks might look superficially cheap relative to bond yields, but they continue to offer little appeal in an “absolute” valuation sense.

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We believe the first move toward tighter policy occurred in January when the Fed first reduced the rate of its monthly bond purchases by $10 billion to $75 billion.

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With commodity prices falling in recent months and consumer prices in the Eurozone almost flat over the latest 12 months, we’re surprised that inflation fears continue to climb the list of U.S. investor worries.

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Share repurchase activity in the S&P 500 dropped off in the second quarter, after first quarter buybacks challenged the all-time high levels seen in the second and third quarters of 2007 (a window of history that should ring a bell).

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Surging bond prices in Europe have opened a yield gap with the U.S. This premium favors more dollar strength in the coming months. In equity markets, the short term volatility in the dollar is a mildly bearish signal.

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Statistically, stocks perform a bit better in an environment of dollar strength than dollar weakness. The best stock market action, however, occurs when there’s relative calm in the forex markets.

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While a new secular bear market in commodities commenced in 2011, we still look for tactical opportunities in commodity-oriented stocks to arise from time to time.

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Gold market fundamentals appear superficially bullish...

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Consumer Discretionary and Information Technology produce six of the top ten groups.

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Small Cap Premium Bounces Back To 23%

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The bull market has pushed short-term annualized performance readings well above median levels, while the longer-term readings remain subdued. But there is a silver lining…

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We “mapped” current readings on six time-tested valuation ratios to the month in which those readings were first matched or exceeded as the late 1990s market bubble developed.

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EM valuations look cheap in a stock market world that otherwise doesn’t. But even their “cheapness” bothers us.

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Last month we suggested the top sector for 2013 would fall from grace in 2014, and the Consumer Discretionary stocks have been quick to cooperate in the last five weeks.

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