At which point do rising interest rates spark the fire? Rates are key to the equation of risk. In Friday’s On My Radar, Steve surveys what the current equity market valuations tell us about risk… and likely forward returns. Should you be playing more offense than defense or more defense than offense? Valuations can help.READ MORE
In Friday’s On My Radar, Steve provides his much-anticipated market outlook for 2018.
Steve says, “The weight of market trend evidence remains bullish. I remain focused on both market momentum and trend evidence. Despite the aged, overvalued and over-bullish environment, as evidenced in Trade Signals each week, I remain moderately bullish on both equities and fixed income.”READ MORE
On Friday, December 15, CMG Founder and CIO Steve Blumenthal was interviewed by Nasdaq global markets reporter Jill Maladrino. Jill asked Steve about the current state of the market, his 2018 outlook and his recent On My Radar piece called “Start Small, Grow Tall.”
Click below to watch the short interview.
Every month, Steve reviews several market valuation metrics in an effort to provide visibility into forward 7-, 10-, and 12-year returns. In this week’s On My Radar, Steve looks at Median P/E and also shares GMO’s 7-Year Asset Class Real Return Forecasts. It’s a must-read!READ MORE
Every month, Steve reviews several market valuation metrics in an effort to provide visibility into forward 7- and 10-year returns. In this week’s On My Radar, Steve looks at Median P/E and Warren Buffett’s favorite measure, Total Stock Market Cap to Gross Domestic Product. Additionally, Steve shares GMO’s 7-Year Asset Class Real Return Forecasts. It’s a must-read!READ MORE
My favorite trend following indicator is something we co-created with Ned Davis Research. It looks at the underlying trends in 22 industry sectors and scores the weight of evidence on a 0 to 100 scale. Here is the chart if you haven’t seen it before (note: I post it every Wednesday afternoon in Trade Signals). The trend for equities is currently bullish.
What about bond exposure? We monitor the Zweig Bond Model.
Please refer to the March 10, 2017 post of On My Radar for an explanation of how it works.
Finally, I believe the key to investing and perhaps the most important lesson to learn is how money compounds over time. To that end, I wrote a piece called the “Merciless Mathematics of Loss.” Next is the chart and you can find the full piece here.
The number one rule many of us were taught is “Don’t Fight the Fed.” I like to add “trend” into that equation and, as you’ll see in the next chart, the math is compelling.
When the Fed raises rates (don’t fight them) and the trend turns negative, equities underperform. Focus on the red arrows. Two different time periods are measured, however, the message is the same. The big corrections come when both the Fed and trend turn negative. I wrote some time ago in On My Radar to “watch out for minus 2.” We currently sit at -1. I’ll share this chart from time to time – especially if -2 is triggered.
Here is how you read the chart:
- The top section plots the S&P 500 Index but focus on the middle section.
- NDR has a Multi-Cap Tape Composite Model to measure the technical health of the broad equity market. That model aggregates the signals of over 100 component indicators and generates a signal based on the percentage of the component indicators that are giving a bullish signal for the S&P 500. It measures momentum and trend.
- The Fed component is really an interest rate component, which measures the trend in rates by looking at the yield on the 10-year Treasury note. When the 10-week trend in yields are lower than their 70-week trend in yields, the S&P 500 has produced larger gains. When it is higher, the S&P 500 has performed poorly. It’s that simple.
- The combined indicator can produce a score of -2 (both indicators are bearish) to +2 (both bullish) and overall have done a good job historically as a risk-on/risk-off indicator.
- The current reading is -1 (data shows we need to watch out for -2): refer to the red arrows.
Source: Ned Davis Research
Last week, the investment staff of CalPERS — the $300 billion California pension fund — announced that they want to reduce its target of 7.5 percent annual returns. According to Chief Investment Officer Ted Eliopoulos, achieving a 7.5 percent annual return is no longer realistic. Holy cow!
The implications of this proposal, if adopted, are significant and “would trigger more pain for cash-strapped cities across California and set an increasingly cautious tone for those who manage retirement assets around the country.”
Can you imagine how many people are going to be affected? Here’s the bottom line. The pension system, across our great nation, is underfunded and in trouble.READ MORE
Interesting chart from Ned Davis Research. Most people believe that Republican control is pro-business and thus good for stocks.
Early each month, we look at market valuations to see where we are. It’s also important to consider what valuations may indicate with respect to probable (7- and 10-year) forward returns. We believe risk is most when we feel it least and the risk is least when we feel it most. Today, we feel it least.
In Friday’s On My Radar, we presented several valuation charts, including median price-to-earnings (P/E) and Warren Buffett’s favorite.
Bottom line: the market remains overvalued. Trend following strategies can help you participate and protect.