Stocks Surge as Global Outlook Brightens The Dow industrials surged more than 300 points to their first-ever close above 21000, underpinned by the Federal Reserve’s growing confidence in the U.S. economic outlook and by investor hopes that President Donald Trump will deliver policies that boost growth.
(…) Stocks were powered in part by new signals from the Federal Reserve that officials are growing confident enough in the economic outlook to raise short-term interest rates as early as a meeting later this month, traders said, as well as by solid data and the generally positive reaction to President Donald Trump’s speech to Congress on Tuesday evening. (…)
“We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing and risks to the outlook are as close to balanced as they have been in some time,” Fed governor Lael Brainard said Wednesday in a speech at Harvard University. “Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path.”
Ms. Brainard’s comments were striking because she has been among the Fed governors most resistant to raising rates in recent years. That she now appears on board with another move suggests Fed Chairwoman Janet Yellen has a growing consensus behind her. (…)
signs are building that the global economy is emerging from a long period of deflationary pressure marked by excess capacity in factories and labor markets. On Wednesday, German annual inflation was reported at 2.2% in February, its highest level in 4½ years. Annual inflation across the 19-nation eurozone is expected to rise above 2% when February data are reported Thursday. In Japan, data due Friday are expected to show the primary inflation gauge—consumer prices except fresh food—rose in January from a year ago, turning positive for the first time in 13 months.
In the U.K., inflation is at a two-year high of 1.8%, and the Bank of England expects it to rise toward 3% this year. That is partly the result of a sharp drop in the sterling’s value following the nation’s vote to leave the European Union. Food chain Greggs warned on Tuesday it is facing increased inflationary pressures, as a weaker currency makes imported food more expensive.
Inflation isn’t a good thing in itself; it eats away at the purchasing power of take-home pay and savings. But for years, central bankers have fretted that low inflation was a sign of weak global demand and underused resources, and an indication of their own failure to use low interest-rate policies to reach inflation targets. (…)
Some companies are scrambling to adjust. (…) “With components getting so expensive, we’ve had to increase our prices. That’s really squeezed our profits.” (…)
Underlying momentum in the economy remains modest. Forecasters this week marked down their expectations for U.S. growth in early 2017 after weak readings on consumer spending, international trade and construction outlays. Macroeconomic Advisers on Wednesday projected gross domestic product would expand at a 1.6% annual rate in the first quarter, compared with a 1.9% growth rate in the final three months of 2016. (…)
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 1.8 percent on March 1, down from 2.5 percent on February 27.
The rate of expansion in global manufacturing production accelerated to a three-year high in February, underpinned by stronger growth of total new orders and rising levels of
international trade. Business confidence also improved, encouraging faster job creation.
The headline J.P.Morgan Global Manufacturing PMI™ rose to a 69-month record of 52.9 in February, up from 52.7 in January. PMI indices tracking trends at consumer, intermediate and investment goods producers pointed to a broad-based improvement in operating conditions. Rates of expansion were broadly similar across all three sectors. Growth was led slightly by the consumer goods industry, whereas intermediate goods was the only category to register a faster rate of expansion than in January.
National data suggested that developed nations tended to fare better than emerging markets during February. PMI levels edged higher in the euro area (70-month high) and Japan (35-month high) to offset mild decelerations in the rates of expansion in the US and the UK.
Although the rate of improvement across emerging markets remained weaker than that for developed nations, it was nonetheless slightly faster than in January. This stronger upturn mainly reflected growth accelerations in China, India, Vietnam and the Czech Republic. (…)
February saw international trade flows strengthen, as highlighted by new export orders rising to the greatest extent in almost six years. Improved rates of growth were signalled by both developed and emerging nations.
Average input prices continued to rise at a marked pace in February, with the rate of inflation remaining close to January’s 68-month record. Companies passed on part of the increase in costs to clients, leading to higher selling prices. Moreover, rates of increase in output charges during the past four months have been the fastest registered by the survey since mid-2011.
Based on a preliminary estimate from WardsAuto, light vehicle sales were at a 17.47 million SAAR in February. That is down about 1% from February 2016, and unchanged from last month. This was below the consensus forecast of 17.7 million for February.
The value of construction put-in-place fell 1.0% in January (+3.1% y/y). This decline did follow upward revisions to December and November, with December now up 0.1% versus -0.2% reported initially, and November up 1.5%, revised from 0.9%. The latest decline compares to expectations in the Action Economics Forecast Survey for a 0.5% increase.
From the Fed’s latest Beige Book:
- Labor markets remained tight in early 2017, with some Districts noting widening labor shortages.
- In general, wages in most Districts rose modestly or moderately, with a few reporting some pickup in the pace of wage growth. A number of Districts noted that shortages of skilled workers–particularly engineers and IT workers–were driving up their wages, and there were also some reports of labor shortages in the leisure and hospitality, construction and manufacturing industries.
One of today’s Bloomberg feature articles:
(…) Rather, they seem reasonably close to fair value. As for the future, many factors may emerge that can increase or decrease the attractiveness of stocks, albeit with more potential positives than negatives. So on balance, there’s reason to be cautiously positive on the equity-market outlook.
(…) So although stock indexes are at record levels, valuations are not. And that’s the only sensible criteria by which to judge whether the stock market is expensive.
The price-earnings multiple is one key metric to judge valuations, though it suffers from some weaknesses. Since 1954, the S&P 500 P/E trailing multiple has averaged about 16.6. But this encompasses very high P/E periods, such as the 1950s and the 1990s and exceptionally low P/E periods, such as the 1970s. Using a simple average treats radically different periods equally, which is simplistic, naïve and wrong.
While the current market P/E is somewhat above average, that average is a meaningless mix of high and low interest rates and P/E multiples over very different economic environments. As anyone who has ever worked with a dividend discount model understands, high interest rates imply low P/E multiples and low interest rates imply high equilibrium P/Es. If we focus on those periods when inflation and interest rates were low, as they are today, the implied equilibrium P/E multiple is well above the historical average, but also above the prevailing multiple in today’s market. Indeed, with interest rates still close to record lows, the appropriate equilibrium for the market’s P/E multiple should be high. (…)
Decide by yourself whether stocks are fairly or overvalued:
It is true that “using a simple average treats radically different periods equally, which is simplistic, naïve and wrong.” Hence the Rule of 20 which says fair P/E is 20 minus inflation. By this time-tested rule, the S&P 500 Index is currently 12.5% overvalued.
In the last week, insiders’ sale transactions on the NYSE outnumbered their purchase transactions by more than 11 to 1, according to Vickers, a publication of Argus Research. The 11.47 reading is 3.5 standard deviations above the mean, according to Coleman.
The report gives context on the historical relationship between the market and its insider readings:
“The last time we saw both reading at such elevated levels was in early 2014, when the total reading hit 8.3 and the NYSE/ASE reading was 6.16. In response, the S&P 500 fell from 1844 to 1741 between 1/22/14 and 02/03/14. On February 14, 2007, the NYSE/ASE reading was 11.77 and the Total reading was 7.99 Again, the S&P 500 fell — this time from 1455 to 1387 within a matter of days.”
Vickers tracks its sell/buy ratio over a period of varying time lengths in order to get a better idea of whether one week is part of a bigger trend. Its longer-term eight-week ratio for all U.S. stocks shows this is not just a short-term trend, with 5.98 buy transactions for every sale over the last two months. On the chart below, the eight-week sell/buy ratio is tracked inversely on the right scale, with the stock market on the left scale. The research shop does it this way to illustrate the divergence between insiders and the market: The Dow Jones industrial average keeps going higher, yet insiders keep dumping stock.
Writes Coleman: “The number of insiders participating in the selling is significant. That would seem to imply that equities might be ripe for some level of correction.”
Here’s another measure: