Here is our look at markets between the Roman Calendar’s New Year and the Lunar New Year. Photo by Anthony Kwan/Getty Images News.
At just past the halfway point of Q1, many might wonder where things stand. After all, if you don’t live and breathe markets, you might focus on the headline items (Greece, oil, the dollar,[i] etc., etc., and so forth) and miss the actual action. Here is a quick roundup to update you on some interesting market movements year to date.
Stocks Up, Yields Not
Here is a myopic look at stocks year to date.
Exhibit 1: A Myopic Look at Stocks in 2015 to Date
Source: FactSet, MSCI European Economic and Monetary Union, MSCI World, S&P 500, MSCI World Ex. USA, 12/31/2014 – 02/18/2015. All in USD including net dividends, except S&P 500, which includes gross dividends.[ii]
After a bouncy January with negative news from Greece stealing most headlines, you might be surprised to learn a) stocks are up and b) eurozone stocks are leading. Now, this is obviously a myopic look given it’s only 35 days’ worth of data, but it’s an interesting take nonetheless, to us.
What’s not up? US 10-year yields are flat. British yields are up, but only by 0.09 percentage point. German and Swiss 10-year yields are down. Yes, these are a selection. Yes, they’re a myopic look. We are just doing our duty and showing market action to date, no strings or opinions attached.
Exhibit 2: A Myopic Look at Selected Sovereign Bond Yields
Source: FactSet, US, Swiss, Germany and UK 10-Year Yields, 12/31/2014 – 02/18/2015.
Perhaps this is because inflation data keep showing few price pressures. Perhaps it’s because the ECB announced full-scale sovereign bond buying. But whatever the explanation, thus far in the year there isn’t much sign ultralow and falling rates signal any more risk to the bull market than they did last year.[iii] One other thing falling rates show is illustrated in Exhibit 3—Greece’s debt troubles and economic problems do not seem to signify a broad return of either 2010 – 2012’s euro fears or a contagion. Here are 11 of the 19 eurozone nations’ bonds yields in a picture.[iv]
Exhibit 3: The Sore Thumb of Europe
Source: FactSet, 10-Year Sovereign Bond Yields, 11 selected eurozone nations, 12/31/2009 – 02/18/2015.
Are Stocks Overvalued?
As the S&P 500, DAX and FTSE 100 all breached or approached new record highs, the media has returned to banging its “STOCKS ARE OVERVALUED” drum. Some merely allude to trailing price-to-earnings ratios, which as we’ve written, aren’t predictive. Yet another claims the median P/E suggests stocks are “the most overvalued in history,” but this is just tortured less-than-predictive data, really. Others lean on the very backward-looking and bizarrely inflation-adjusted Cyclically Adjusted P/E (Shiller P/E or CAPE), which we have been on-again, off-again warned is signaling euphoric markets for the better part of three years.
Here is the thing: Valuations, no matter how you slice them, are not reliable predictors of market direction. Exhibit 4 shows the S&P 500 and the CAPE, with gray areas indicating points when CAPE was higher than today. Note the S&P 500 (blue line) does not seem to have a propensity to fall when CAPE is even higher than today’s allegedly lofty level.
Exhibit 4: S&P 500 CAPE and S&P 500 Index Level
Source: FactSet, Multpl.com, as of 02/19/2015. S&P 500 CAPE (Monthly) for the period Monthly S&P 500 Total Return Index level January 1991 – January 2015.
So what do valuations show? Forward price-to-earnings ratios for US, foreign and world stocks show they are modestly above their longer-term averages, but far from bubblicious levels.
Exhibit 5: 12-Month Forward P/Es: S&P 500, MSCI World and MSCI World Ex. USA
Source: FactSet, as of 02/19/2015. 12/31/1999 – 01/31/2015.
Perspective on the Dow’s Swings
In 2015 to date, the Dow has moved up or down by more than 100 points on ten occasions.[v] Some headlines still shriek about triple digit moves as though they demonstrate big volatility. Thing is, they don’t.
For one, the Dow is a broken, flawed gauge.[vi] But for our purposes today, consider that a 100-point move in the Dow isn’t big these days. Exhibit 6 shows the percentage move 100-, 200-, 300- and 1000-point Dow moves actually account for over time.
Exhibit 6: Dow Swings in Perspective
Source: FactSet, Dow Jones Industrial Average, 12/31/1985 – 02/18/2015.
A 100-point Dow swing, based on Dow 18,000, is about a 0.5% move. That’s it! Is that fear-based headline worthy? A 1,000-point Dow swing is now only a 5.55% change. Thirty years ago 1,000 points were 70 percent of the average’s value! Compound growth has massively devalued 100 Dow points. (Though again, we’d suggest you discount the Dow for construction reasons.)
Stock Market Outlook
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[i] Worried about the dollar? Click here for our in-depth research analysis, yours for the low-low price of zero.
[ii] Net dividends are reduced for Luxembourg taxes, a standard practice for looking at returns in USD from partly foreign sources. It is also standard not to apply this calculation in home currency.
[iv] The other eight are Cyprus, Estonia, Latvia, Lithuania, Malta, Luxembourg, Slovakia and Slovenia, and they are cumulatively economically dinky.
[v] Source: FactSet, Dow Jones Industrial Average daily change in points, 12/31/2014 – 02/18/2015.