Thursday, June 29, 2023

Morning Note: Second Half Equity Market Setup

On January 1 of this year the PWA (general conditions) Index scored -24.4, it scores -17.7 today… Our Financial Stress Index scored -18.18, it scores -18.18 today… Our Fear/Greed Barometer scored +12.50 (slightly net fear), it scores -75 (bigly net greed) today… SP500 price-to-earnings ratio was 18, it's 21 today… Price-to-book was 3.9, it's 4.2 today… Price to sales was 2.2, it's 2.4 today… US total equity market cap was 158% of GDP (the "Buffett Indicator"), it's 173% today... The Shiller Cyclically Adjusted Price to Earnings Ratio (CAPE) was 28.09, it's 30.55 today... The PWA Equity Market Conditions Index scored -33.3 to start the year, it scores -50 today.

Suffice to say that economic conditions still lean recessionary, that financial conditions remain somewhat tight, that market actors (individuals and pros) were uncertain about the go-forward prospects for equities to start the year and that they’re not-so (they’re bullish) today, that stocks are notably more expensive (i.e., rising prices have not, to this point, been remotely matched by the underlying fundamentals) today than they were to start the year, that, at the end of the day, overall equity market conditions are presently net-worse than they were on January 1…

In a nutshell, while anything can happen, the equity market holds greater risk of some meaningful downside action heading into the second half of the year than it did heading into the first.

I’m with Discipline Funds' Cullen Roche on the implications of what, at first blush, would be a more “bullish” scenario playing out:
“...what happens in a higher for longer scenario, where the economy is much stronger, you actually potentially get this sort of whipsaw effect where the higher they (interest rates) are for longer, the higher credit risk is across the entire credit system… And so that weirdly increases the risk of a hard landing going into 2024.” 

In other words, and as I keep stressing, without notable economic weakness there’ll be no Fed pivot to easy monetary policy… I.e., inflation, while indeed coming off the boil of late, likely doesn’t – in any sustainable fashion, if at all – get to their 2% target without something breaking along the way.

Stay tuned...

Asian stocks were mostly green overnight, with 12 of the 16 markets we track closing higher.

Same for Europe so far this morning, with 14 of the 19 bourses we follow trading up as I type.

US equity averages are (save for Ndq 100) higher to start the session: Dow by 127 points (0.38%), SP500 up 0.17%, SP500 Equal Weight up 0.31%, Nasdaq 100 down 0.04%, Nasdaq Comp up 0.04, Russell 2000 up 1.09%.

As for yesterday’s session, US equity averages closed mixed: Dow down 0.2%, SP500 down 0.1%, SP500 Equal Weight down 0.2%, Nasdaq 100 up 0.1%, Nasdaq Comp up 0.3%, Russell 2000 up 0.5%.

This morning the VIX sits at 13.73, up 2.23%.

Oil futures are up 0.70%, gold's down 0.47%, silver's down 1.45%, copper futures are down 1.52% and the ag complex (DBA) is down 0.67%.

The 10-year treasury is down (yield up) and the dollar is up 0.49%.

Among our 34 core positions (excluding options hedges, cash and money market funds), 15 -- led by XLF (financial stocks), OIH (oil services companies), XME (metals miners), MP Materials and ITA (defense stocks) -- are in the green so far this morning... The losers are being led lower by VNM (Vietnam equities), TLT (long-term treasuries), EZA (South African equities), DBB (base metals futures) and SLV (silver).

I so sympathize with Ray Dalio in the following:
“He who lives by the crystal ball is destined to eat ground glass” is a market adage I learned when I was about 14. Since I’ve personally experienced it to be true, it has affected how I look at both the future and the past. I have learned to look at the past 1) to determine what’s likely to happen and 2) to protect myself and others I am responsible for against the possibility I am wrong or missing something important.
--Dalio, Ray. Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail

Have a great day!

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