High P/E Market Valuations Misleading Trump’s Chumps

Posted on Posted in Views From The Hill

By J Clinton Hill, Capital Markets Strategist @ Hillbent.com

Investment Market Commentary

etf-commentary-equities-bonds-currencies-commodities-real-estateComments will be somewhat brief as I have supplemented Thursday’s report with charts and data. Today I will address the high P/E market valuations, which I believe may be misleading US stock investors into being Trump’s chumps. First, here is a nutshell summary of market moving events:

  • Employment: Initial Jobless Claims dipped another 10k this week to 258k vs. previous @ 268k and estimates @ 255k. The 4-week moving average, more importantly, historically low @ 252.5k.
  • Central Banks / Europe: The ECB will reduce its asset buying program to €60 billion vs. €80 billion per month as of April 2017. However, President Draghi reassured the markets that he would expand or extend QE beyond December 2017 if necessary or if inflation targets are not within range.
  • Interest Rates / FedWatch Tool: The CME Group’s indicator is assigning a 97% probability of a Federal Reserve rate hike this December.

Either because or in spite of the above, stocks continued rallying to new highs. The SP-500 (SPY), Dow-30 Industrials (DIA) and Russell-2000 (IWM) reached new record levels while the Nasdaq-100 (QQQ) moves closer to challenging its own all-time high. For a reality check, here is a P/E data table I have created based on data sourced from Birinyi Associates. 

Market P/E Valuations

Index Current TTM P/E Last Yr TTM P/E Forward Est. P/E
SP-500 24.22 22.71 18.41
Dow-30 Industrials 21.40 16.87 18.02
Nasdaq-100 23.45 22.95 18.96
Russell-2000 nil 144.68 19.38

 

For added measure, I have provided a chart of the SP-500’s historical P/E ratios. The graph below shows market valuations at extreme levels and vulnerable to a potential contraction. There are essentially two ways for this to occur: 1) the market corrects in price with a sell-off; or 2) earnings growth occurs at a rate that is faster than market appreciation or the market stalls in price advances while earnings growth aids in the compression of the P/E multiple. (I’ll let you decide how this one ends.)

S&P 500 Historical P/E Valuations

High P/E Market Valuations Misleading Trump's Chumps
click to enlarge

 

Yet the most important indicator we can rely on is price, so I have also included a chart depicting 4-day timeframe candlesticks of the SP-500 (SPY). No one can dispute that the trend is bullish, but the decline in volume dollars flowing into it as prices increase betrays early signs of buyer exhaustion. Again, I’ll let you come to your own conclusions, but I might extend the courtesy of warning you to be careful with this market, lest you find yourself being Trump’s chump.

Price-Volume Analysis Chart of S&P 500 (SPY) ETF

SP-500 trend is up but volume dollars declining
click to enlarge

 

(Please refer to our ETF summary table below for a performance analysis of asset classes.) 

 


ETF Performance Summary

 

RS 1Yr Exchange Traded Fund Last Chg % Chg
  Equities  
99 DJ-30 Industrials (DIA) 196.28 0.80 0.41%
99 SP-500 (SPY) 225.15 0.55 0.24%
96 Nasdaq-100 (QQQ) 118.57 0.21 0.18%
100 Russell-2k (IWM) 138.04 2.14 1.57%
82 EAFE (EFA) 58.47 -0.05 -0.09%
82 Emerging Mkts (EEM) 36.36 0.16 0.44%
57 Europe FTSE (VGK) 47.47 -0.28 -0.59%
76 Latin America 40 (ILF) 28.35 -0.05 -0.18%
74 Brazil (EWZ) 33.01 -0.27 -0.81%
6 Japan (EWJ) 51.10 0.58 1.15%
92 Pacific Ex-Japan (EPP) 41.81 -0.07 -0.17%
87 FTSE China 25 (FXI) 37.69 0.00 0.00%
1 VIX Short-Term Futures (VXX) 26.28 0.06 0.23%
     
  Major Equity Sectors  
99 Consumer Discretionary (XLY) 84.12 0.00 0.00%
45 Consumer Staples (XLP) 51.30 -0.21 -0.41%
100 Energy (XLE) 76.36 0.41 0.54%
84 Financials (XLF) 23.70 0.22 0.94%
40 Healthcare (XLV) 68.02 0.13 0.19%
98 Industrials (XLI) 63.69 -0.36 -0.56%
99 Materials (XLB) 51.49 0.34 0.66%
41 Real Estate (XLRE) 30.99 0.16 0.52%
99 Technology / Info (VGT) 122.37 0.69 0.57%
89 Telecom (IYZ) 33.80 0.17 0.51%
52 Utilities (XLU) 47.46 0.08 0.17%
     
  Bonds & Fixed Income  
5 20+ Yr Treasury (TLT) 118.98 -1.42 -1.18%
12 Aggregate Bond Fund (AGG) 108.17 -0.20 -0.18%
51 Treasury Inflation Protection (TIP) 113.32 -0.11 -0.10%
34 Investop Corp Bond (LQD) 116.65 -0.48 -0.41%
91 High Yield Corp Bond (HYG) 86.45 -0.01 -0.01%
16 Pimco Intermed Muni Bonds (MUNI) 52.49 -0.20 -0.38%
28 High Yield Muni (HYD) 29.46 -0.12 -0.41%
     
  Currencies  
91 US Dollar Bullish (UUP) 26.13 0.23 0.89%
7 Euro Trust (FXE) 103.12 -1.48 -1.41%
33 Japanese Yen Trust (FXY) 84.66 -0.17 -0.20%
     
  Commodities  
94 DB Commodity Index (DBC) 15.52 0.03 0.19%
37 Gold (GLD) 111.57 -0.26 -0.23%
76 US Oil (USO) 11.31 0.22 1.98%
     
  Real Estate  
58 DJ Real Estate (IYR) 77.38 0.39 0.51%
89 DJ Home Construction (ITB) 29.08 0.53 1.86%
44 Residential Real Estate Index (REZ) 61.52 0.44 0.72%

 

Signing off @ Hillbent…

 

(For more a more detailed and extensive coverage of ETFs, please refer to our premium research service, ETF LookOut Points.)

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