Weekly Market Updates

Investment Strategy: “Charts of the Week”

Jul 12 2017

By Jeffrey Saut

An article on CNBC.com caught my eye last week with a headline about how it has now been ten years since the S&P 500 started to top out ahead of the Financial Crisis/Great Recession. As explained in the text, while the index didn’t actually peak until October of 2007, the topping process began around July as the market quickly dived 9% before staging a futile rally into that October high of 1576.09. The whole article is worth a read and does a great job of summarizing some of the key similarities/differences between 2007 and 2017, but I want to highlight an important part that I feel often gets lost now that we’re almost a decade past those events: “Valuation was not the trigger for the collapse in '07. The fact that earnings began to sag and financial-company profits —  the single largest segment — proved largely illusory was the critical driver.” With all the talk about valuations these days, so many people are trying to compare today’s market to previous tops –  most commonly 2007 and 2000 which were both part of the same secular bear market –  without factoring in the entire underlying investment and economic environment that accompanied them. In other words, these investors are zeroing in on. There are so many data points and indicators out there that it is very easy to find reasons, at all times, why stocks may go up or down, but, at the end of the day, if earnings are growing it becomes difficult for aggregate stock prices to fall too much.

If the market is to drop significantly from here, it’s not going to be because everyone suddenly figured out the market cap-to-GDP ratio was extended or that valuations were stretched beyond a certain arbitrary threshold. It will more likely be caused by the economy starting to slump and earnings resuming the declines we saw from 2014-2016. And because the stock market has historically proven to be a fairly good leading indicator for both the economy and earnings, our primary focus is on stocks themselves instead of the multitude of data points that tend to get singled out one-by-one. It’s not that these data points don’t matter or that they’re not worth keeping in mind (we definitely do monitor and analyze them), but, as we continue to state, until the market starts to crumble under the weight of these negative items we don’t believe mo st long-term investors should take drastic action and unload their stocks. Keep in mind, the S&P 500 topped out in October 2007 but the real damage of that bear market was done much later. Moreover, there had already been clear deterioration under the surface of the market well before that October 2007 peak, with the percentage of stocks in the S&P 500 above their 200-day moving average topping out in February 2007 at 91% before crumbling to under 50% by October. Our main goal, therefore, is less about trying to cherry pick an absolute top of a multi-year secular bull market in advance of it happening, and more about spotting when things look to be getting better and when they look to be getting worse. The good news is that perfect precision and prognostication isn’t required for long -term success in the market, which is fortunate since I don’t know how to chart blind luck.

NOTE:  Next week I will be attending the Raymond James & Associates Summer Development Conference in Washington D.C. I mention this because it means the Charts of the Week may be a little light next Wednesday due to traveling/presenting, but I also want to invite anyone that will be there to my session. I can only assume Raymond James wanted to kick off the conference with a bang because my presentation is in the very first time slot from 3:00 PM – 3:50 PM on Tuesday, July 18. So, if you’re not going for a fashionably late arrival, please stop by as I discuss the key investment themes we believe will drive the market over the next few years, specific investments that play to those themes, as well as detailing how we go about trying to find the high-growth areas that often become the “next big thing.”


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