Valuations

The Social/Mobile/Cloud theme (SMC) has dominated the stock market in recent years, eventually reaching a frenzied peak in the summer of 2018.

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Donald Trump is thought to have been born with a silver spoon in his mouth, and the economic circumstances prevailing at his inauguration two years ago might have further perpetuated that view. The U.S. economy had already been in recovery mode for 7 1/2 years, and the bull market in U.S. stocks was about to celebrate its eighth birthday.

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We wrote in the January Green Book that the S&P 500 Christmas Eve low did not have the “right look,” in that: (1) there had been no sign of “smart money” accumulation beforehand; and, (2) downside momentum was also at a new low for the entire correction. Smart money buying is measured by the Smart Money Flow Index, which evaluates trends in first half-hour market action (considered to be more emotional and news-driven), and the last hour of trading (viewed to be more informed and institutional in nature).

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Momentum strategies aren’t for everyone. Still, contrarians should recognize that buying the prior year’s worst performing sector for a one-year hold has been an underperforming proposition over the long term.

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While our market disciplines remain negative, we certainly aren’t oblivious to the haircut in equity valuations that’s already occurred.

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The S&P 500 Low Volatility Index has performed so well for so long that the ETF based on the index has amassed more than $8 billion.

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We should emphasize that our characterization of stocks as dangerously overvalued applies only to the U.S. market.

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The longevity of this bull market is impacting tactical asset allocators in ways great and small.

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In late January we speculated how long it would take for the S&P 500’s bloated valuations to reach more reasonable levels. The S&P 500 now trades back where it was in January and the seven-month break included some of the best growth rates most have ever seen. We found ourselves asking: Did chubby Mr. Market shed any pounds as he pedaled away on his stationary bike?

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Many equity investors have suggested there’s no comparison between today’s expensive market and the bubble peak of Y2K, pointing out that today’s Technology titans are “real companies” with massive revenue underpinnings.

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The S&P 500 finally erased the losses from its nine-day swoon in January and February.

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How do today’s cyclical conditions stack up with those accompanying other stock market declines? 

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No, it’s not a 1990s-like love affair with the stock market. But it’s surely a sign of the times when TV pundits seem to have dropped even passing references to valuation when spinning their mostly bullish market yarns.

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The stock market liquidity squeeze we’ve discussed this year hasn’t played out quite like we expected. Traditionally, Fed tightening and slowing money growth hit Small Caps earlier, and harder, than the blue chip stocks...

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An important feature of this bull market—and a reason for its longevity—is the slow recovery in investor attitudes relative to valuation altitudes...

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Old age has certainly put no limitations on the bull’s exploits, so we should be cautious in reading too much into its meandering recovery path. However, it’s possible that action since the February low is not a recovery process but rather a countertrend bounce within a larger downtrend.

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Things were bigger when you were a kid. Like that enormous sweatshirt your aunt gave you for your birthday or that hand-me-down ten-speed bike with the cross bar taller than your shoulders.

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So, what happened to the January Barometer—the old analyst’s maxim that a market gain in January portends a gain for the full year?

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The remarkable stock market breadth and momentum chronicled in these pages doesn’t come without a price.

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Comparing current valuations to March 2000 is unfair to March 2000. Any Value or Small Cap manager from that era can attest that values became more plentiful as the S&P ascended into its narrow peak.

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