Markets Losing Momentum in the midst of an Epic Bubble and a Halt to the Printing Press?
Summary
Many investors feel that stock market valuations are at historic highs, trading at bubble valuations
Broad stock market averages appear to be losing momentum, struggling to produce gains
Investors should consider being cautious now that the Federal Reserve is turning off the money printer.
Historic Highs – Bubble Valuations
According to many, the U.S. stock market is trading at extremely high valuations as measured by numerous valuation metrics. One of the broadest measures of stock market valuation is the ‘equity market cap to GDP’ metric; Warren Buffett’s favorite coincidently. Simply, some investors gauge the value of the stock market compared to the economy (value of all stocks divided by GDP, as determined by the sources listed at the bottom of the graph below).
Between 1870 and 1996 the stock market has typically been 50% of the value of GDP. The dot.com bubble pushed the ratio up to a ratio of 150%. The money printing by the Federal Reserve Bank and the US Government, after the 2008 Credit Bubble, has pushed the ratio up to about 200%. This is roughly four times the historical average.
Loss of Momentum?
The leadership group for many years has been the mega cap technology stocks that make up the FAANG+M index. This index has struggled to produce gains and has experienced a lot of volatility, with numerous -5% to -10% corrections. ($NYFANG chart courtesy of www.stockcharts.com)
In a normal bull market small cap stocks tend to outperform large cap stocks (the S&P 500 for example). Here we see that the S&P 600 Small Cap Index has been flat for the past ten months, with a volatile trading range of about -14%. Small cap stocks have not been outperforming. ($SML chart courtesy of www.stockcharts.com)
When growth stocks don’t do well (such as the previously mentioned $NYFANG index) value stocks tend to do well (this isn’t always the case but generally they tend to offset eachother). The S&P 500 Citigroup Pure Value Index is representative of those companies and they have struggled to produce gains over the past seven months, illustrating a loss of momentum. ($SPXPV chart courtesy of www.stockcharts.com)
Finally the Value Line Geometric Index is representative of the 1,600 largest companies in the U.S. stock market but equally weighted. The index is a great proxy for understanding how the broad market is doing because it includes large cap, mid cap, and small cap stocks. The index has been flat for the past 10 months, losing momentum, struggling to resume the bull trend. ($XVG chart compliments of www.stockcharts.com)
Caution is Warranted
Investors should be aware that the Federal Reserve’s plans to turn off the money printer and to raise rates, in an effort to combat inflation, could pose high risks to investors in the stock market. Investors should examine their retirement plans and understand how much of their investment accounts they want subject to a potential, major correction in the stock market. Any significant economic developments, geopolitical events, or a break in trend could cause problems for investors.
Highcroft’s Wealth Shield process is a good way, in my opinion, to protect capital.
Note: past performance is not an indication of future results and expectations might not materialize. Current investor concerns could evaporate as fast as they occurred.
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DEFINITIONS
Gross Domestic Product - Gross domestic product (GDP), the featured measure of U.S. output, is the market value of the goods and services produced by labor and property located in the United States.
NYSE FAANG+ Index - An index that provides exposure to 10 of today’s highly-traded tech giants. The index launched on 09/26/2017, prior performance (09/19/2014 to 09/25/2017) is based upon backtested index calculations. Gross total return variants are shown for all of the indices in the chart. The NYSE FANG+™ Index is an equal-weighted index.
S&P 500 Citigroup Pure Value Index - The S&P 500® Citigroup Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme.
S&P 600 Small Cap Index - The S&P SmallCap 600® seeks to measure the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.
Wealth Shield – A rules-based discipline that has capital preservation as its’ primary objective. The program exits investments that have broken a bull trend, shifting those investments into cash which is then ready funds to be reinvested into those investments that have superior momentum characteristics.
The discipline can lock in gains or minimize losses, preventing further declines. Wealth Shield acts as a brake when investments and markets generate downward momentum. Please note that this service is only provided on the Strategic Asset Management (SAM) accounts that Gerald Asplund manages with discretion, it does not apply to any non-discretionary accounts such as brokerage, 401k, or insurance accounts.
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