Investors Wary of Market Peak
Many investors are wary that the market may again be nearing a peak. The market has risen 23.56% since its low on December 24, 2018; but trades at a price-to-earnings multiple of only 21.94. This is only a little above the price-to-earnings ratio of 19.91 reached on January 11th of this year, which was a low for the year. A year ago, the price-to-earnings ratio was 24.30. At that time, S&P 500 corporate earnings were $109.88 versus $132.39 today. According to Factset, corporate earnings are expected to fall 3.9% in the first quarter of this year from a year earlier.
We agree that the market is somewhat overvalued at this time. But that does not mean that a market correction is imminent. Markets can and do stay overvalued for long periods of time. As discussed below in the Economic and Investment Highlights section of this Commentary, we believe the economy is in a stable but vulnerable state. If the economy remains strong, the markets will likely remain strong. If the economy deteriorates, the markets may well correct. There are other events that could trigger a market correction, of course, but economic conditions are the most likely and foreseeable events that could make that happen.
Economic and Investment Highlights
Last Week
Lyft’s stock was reported at the beginning of the week to be trading at $56.11, 22% below its IPO price of $72. The reasons given for the drop were a 12% fall in the price on its second trading day; less than favorable analyst reports; and the possibility of high short interest in the stock.
Manufacturing output was flat in March. Manufacturing output had fallen in the first two months of the year, posting an overall decline of 1.1% (on an annual basis) for the first quarter of the year.
With a recent pickup in exports, the U.S. trade deficit narrowed 3.4% in February from January.
Retail sales in the U.S. were stronger in March. The strong retail showing, along with export data that was stronger than expected, has caused many economists to increase their estimates of first quarter and second quarter economic growth.
A measure of U.S. home building declined in March, continuing a recent trend of weakness.
The shares of both Pinterest and Zoom soared after their IPOs on Thursday. Pinterest was up 28% from its IPO price and Zoom was up 72% at the market close on Thursday.
The Week Ahead
This link takes you to Econoday’s Economic Calendar and Economic Events and Analysis which shows the upcoming economic reporting events scheduled in the week and months ahead.
Summary
Note: The comments that follow are derived from the economic indicators referenced in the Resources section and other sources at the end of this report.
The Philadelphia Fed’s ADS index has been below the zero line but has been trending up. This is a slightly positive sign for the economy.
The Atlanta Fed’s most recent estimate (based on its GDPNow model) of first quarter 2019 GDP growth is 2.8%. This is also a positive sign for the economy.
The New York Fed Staff Nowcast stands at 1.4% for 2019:Q1 and 1.9% for 2019:Q2. Again, this is a positive trend.
The Chicago Fed’s CFNAI index also points to a pickup in economic growth.
All told, these short-term economic indicators are a positive analysis for the economy, at least on a short-term basis.
The AAII Investor Sentiment Index is signaling that investors are becoming more cautious about the markets. The percentage of investors saying that their short-term outlook for stocks is neutral is at a nine-month high. Other parts of the index also signaled increasing caution.
The latest Gross output (GO) reading suggests slow economic growth as we enter 2019.
On a longer-term basis, the forecasters in the Philadelphia Fed’s Survey of Professional Forecasters (as of March 22, 2019) predict real GDP will grow at an annual rate of 1.5 percent this quarter and 2.4 percent next quarter. On an annual-average over annual-average basis, the forecasters predict real GDP to grow 2.4 percent in 2019, 2.0 percent in 2020, and 1.8 percent in 2021. The forecasters predict the unemployment rate will average 3.7 percent in 2019 and 2020, 4.0 percent in 2021, and 4.2 percent in 2022.
For a more in-depth review and analysis of the economy, please see our mini-book on economic analysis and forecasting entitled: Simple and Effective Economic Forecasting.
Stock Market Valuations
Our estimates of the market valuations for two stock market indices, the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500), can be found in the file below:
Conclusion
Overall, as the discussion above suggests, we believe the economy is in a stable but vulnerable state; but has nonetheless remained fairly strong. Please see our complete Economic and Investment Review in the Winter 2019 quarterly issue of the Intrinsic Value Wealth Report Newsletter.
We believe it is important to maintain a long-term view toward investing. This means that you should continue building your investment portfolio using the Cassandra Stock Selection Model to select individual securities that offer growth and value opportunities.
Chart for Review and Thought
S & P 500 – The S & P 500 has risen 23.56% since its low on December 24, 2018 (through April 19, 2019).
Announcements
We have been researching the use of crowdsourcing for investment ideas. We will be sending a survey out in the next few weeks to get your input on the economy and the markets; and to get any investment ideas that you would like to share. We will compile this input and distribute the results to you and our other subscribers.
Dr. Wendee will be speaking at the Las Vegas Investment Club on June 24th. He will be speaking on the topic of his popular Forbes article, Nine of the Best Ways to Build Wealth. Please contact Mike Lathigee at mike@mikelathigee.com if you would like to attend.
Dr. Wendee will be speaking at FreedomFest during its annual conference in Las Vegas, July 17 – 20, 2019.
Intrinsic Value Wealth Creation pyramid
We always conclude our commentary with a discussion of the Intrinsic Value Wealth Creation Pyramid. The Intrinsic Value Wealth Creation Pyramid is designed to show some of the major categories for building wealth. It is the result of many years of study of the wealth building process; experience working with clients who have built considerable wealth; and my own personal experience building wealth. Newsletter subscribers should consult the Intrinsic Value Wealth Creation Pyramid as one of many useful investment tools while considering their investment plans.
The chart in this section is an expanded version of the Intrinsic Value Wealth Creation Pyramid Chart referenced in the Forbes.com article entitled, Nine Of The Best Ways To Build Wealth.
RESOURCES
Economic Indicators
Below are links to a few of the many resources that we follow on a continuous basis to track the economy and financial markets on a short-term and long-term basis.
Real-Time and Current Economic Conditions
The Federal Reserve Bank of Philadelphia’s Aruoba-Diebold-Scotti Business Conditions (ADS) Index is designed to track real business conditions at high frequency. Click Aruoba-Diebold-Scotti Business Conditions Index to access this model.
Click GDPNow to access The Federal Reserve Bank of Atlanta’s GDPNow Forecasting Model.
The Federal Reserve Bank of New York’s Nowcast report tracks the evolution of the FRBNY Staff Nowcast of GDP growth and the impact of new data releases on the forecast. Click Nowcast to access the report and background information on the report.
The Chicago Fed National Activity Index (CFNAI) is a monthly index designed to gauge overall economic activity and related inflationary pressure. Click CFNAI to access this index.
Economy At A Glance
The National Economic Trends charts provided by the Federal Reserve Bank of St. Louis (FRED) can be accessed by clicking the Economy At A Glance link below:
Gross Output
Gross Output is a measure that may be more useful than the Gross Domestic Product (GDP) measure, as it looks at the top line of national income accounting. It is also a good measure to use in conjunction with GDP to get a better overall picture of the economy. This measure can be accessed by clicking the links below:
Surveys of Professional Forecasters
The Survey of Professional Forecasters’ web page offers the actual releases, documentation, mean and median forecasts of all the respondents in the Fed’s Survey of Professional Forecasters. Click the following link to be taken to the Federal Reserve Bank of Philadelphia’s website to access the current survey: Survey of Professional Forecasters.
The Livingston Survey of Professional Forecasters’ web page offers the actual releases, documentation, mean and median forecasts of all the respondents in the Fed’s Livingston Survey. Click the following link to be taken to the Federal Reserve Bank of Philadelphia’s website to access the current survey: Livingston Survey.
Econoday
Econoday offers some excellent resources for understanding and forecasting the economy. The link below takes you to Econoday’s Economic Calendar and Economic Events and Analysis sections. Please see Econoday’s Economic Calendar for upcoming economic reporting events in the week and months ahead.
AAII Investor Sentiment Survey
The AAII Investor Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months: AAII Investor Sentiment Survey.