Weekly Update | March 1, 2024

The very big picture (a historical perspective): The CAPE is now at 34.23. Since 1881, the average annual return for all ten-year periods that began with a CAPE in this range has been slightly positive to slightly negative.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths-out shorter-term earnings swings in order to get a longer-term assessment of market valuation.  A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that further increases in market prices only occur as a general response to earnings increases, instead of rising “just because”).

HISTORY OF THE CAPE VALUE FROM 1871 TO PRESENT

Note:  We do not use CAPE as an official input into our methods. However, we think history serves as a guide and that it’s good to know where we are on the historic continuum.

The big picture: The ‘big picture’ is the (typically) years-long timeframe, the same timeframe in which Cyclical Bulls and Bears operate. The Sherman Portfolios DELTA-V Indicator measuring the Bull/Bear cycle finished the week in BULL status at 78.39 up from the prior week’s 76.60. We’ve been in a cyclical bull Market since April 21, 2023.

The complete picture (four indicators across three timeframes): When all four of the Sherman Portfolios indicators are in a POSITIVE status, we read the market as being in a CYCLICAL BULL MARKET.

1. DELTA-V — Positive
2. GALACTIC SHIELD — Positive
3. STARFLUX— Positive
4. STARPATH — Positive

In the markets:

U.S. Markets: We saw most of the major benchmarks end the week higher, with the Nasdaq Composite joining the S&P 500 Index in record territory for the first time in over two years. The month also closed a strong February, with the S&P 500 marking its strongest beginning two months of the year since 2019, according to The Wall Street Journal. The week’s gains were also broad-based, with an equal-weighted version of the S&P 500 Index modestly outperforming its more familiar market capitalization version. For the year-to-date period, however, the capitalization-weighted version of the index remained ahead by 409 basis points (4.09 percentage points), reflecting the outperformance of large, technology-oriented growth stocks.

Looking at the Indexes: The quarter entered its final month with gains across the board.

The Dow Jones Industrial Average was remained unchanged closing this week at 39,087.The tech-heavy NASDAQ gained 1.76%, closing at 16,275. S&P 500 (large cap) gained 0.99%, closing at 5,137. S&P 400 (mid cap) gained over 2.5%, closing at 2,931. Russell 2000 (small cap) gained 3.0%, closing at 5,160.

Commodities/Futures: The week saw some mixed results for commodities, with oil lifting, gold holding steady, and silver & copper seeing slight declines. GOLD ended the week at $2,050 per ounce, showing a steady hold from the prior week’s close of $2,049.40. SILVER lost 1.1%, closing at $22.72 per ounce, continuing the slow decline from last week’s ending price of $22.98. COPPER, sometimes viewed as a barometer of world economic health, ended the week down 1.5% at $3.83 per pound vs the prior week of $3.89. West Texas Intermediate crude oil saw a bounce back this week with a 2.3% lift, ending at $78.27 a barrel vs the prior week’s $76.49 which had been a 2.5% drop.

International Markets:

The MSCI (Morgan Stanley Capital International) Emerging Markets Index dropped by 0.35% for the week closing at 1024.68.

U.S. Economic News: The defining event of the week in terms of market sentiment appeared to be Thursday’s release of the Commerce Department’s core (less food and energy) personal consumption expenditures (PCE) price index. The index rose 2.8% for the 12 months ended in January, in line with expectations, but the report appeared to calm concerns over the Labor Department’s earlier release of its consumer price index, which showed core prices rising by 3.9%, above expectations of around 3.7%. The core PCE price index is generally considered the Federal Reserve’s preferred gauge of overall inflation pressures.

While stocks jumped on the inflation news, it appeared to have a limited impact on the tone of Fed communications. T. Rowe Price traders noted that 12 Fed policymakers were scheduled to deliver speeches over the week, and all seemed to echo the recent narrative that they were in no rush to cut interest rates. Indeed, according to the CME FedWatch Tool, futures markets ended the week pricing in only a slightly higher chance of a rate cut over the next two policy meetings — 24.6% versus 23.4% the week before.

The rest of the week’s heavy economic calendar arguably surprised modestly on the downside. Most notably, and Institute for Supply Management’s (ISM’s) gauge of manufacturing activity came in substantially below expectations, falling from an 18-month high of 49.1 in January back to 47.8 in February. (Readings above 50 indicate expansion.) Durable goods offered a more reassuring picture, however, rising 0.1% in the month when the volatile defense and aircraft sectors are excluded. An upside surprise came in February personal incomes, which jumped 1.0% in February, the biggest gain in a year.

The reassuring PCE data and downside ISM report helped push the yield on the benchmark 10-year Treasury note to its lowest intraday level since February 13 by the end of the week. (Bond prices and yields move in opposite directions.) U.S. Treasuries also generated positive returns as yields decreased amid a healthily digested Treasury supply concession. Intermediate- and long-term rates fell more than short-term rates. Tax-exempt municipals received an additional boost from light issuance.

Conversely, in the investment-grade corporate bond market, spreads widened throughout the week as the sector struggled with heavy supply. February saw over USD 150 billion in new issuance, a record-breaking amount. Traders noted that issuance was oversubscribed on Monday, however, despite the backup in spreads. Traders also reported subdued trading activity in the high yield market early in the week, although the core PCE price data release helped credit spreads tighten.

International Economic News: In local currency terms, the pan-European STOXX Europe 600 Index ended little changed but remained near record highs. Sticky inflation data prompted investors to reassess the magnitude and timing of interest rate cuts by the European Central Bank in 2024. Major stock indexes were mixed. Germany’s DAX rose 1.81%, while Italy’s FTSE MIB advanced 0.71%. France’s CAC 40 Index lost 0.41%, and the UK’s FTSE 100 Index dropped 0.31%. European government bond yields ended broadly higher.

Both headline and core inflation slowed less than expected in February. Annual consumer price growth in the eurozone slowed marginally to 2.6%. Core inflation decelerated to 3.1%, which was above the consensus estimate of 2.9%.

The European Commission’s economic sentiment indicator declined unexpectedly to 95.4 in February. In the industrial sector, confidence remained broadly stable amid weak production expectations and a possible bottoming out of a drop in new orders. But confidence worsened in the services sector due to lower demand. Selling price expectations eased in both goods and services.

In Germany, annual consumer price growth continued to decelerate in February, slowing to 2.7%. However, core inflation and prices of services rose. Private consumption remained weak, with retail sales falling 0.4% sequentially in January, after dropping 0.5% in December. The seasonally adjusted unemployment rate hovered at 5.9% in February—its highest level in more than two years.

In the UK, the Nationwide Building Society said its house price index rose 0.7% sequentially in February and 1.2% year over year, marking the first annualized increase since January 2023. The Bank of England said mortgage approvals rose to 55,227—the highest level since October 2022, when the budget plans of former Prime Minister Liz Truss sparked a crisis in the bond market.

Japanese stocks had another strong week, with the Nikkei 225 gaining around 2.1%, hovering around a new record high and taking February’s gains to about 10.0%. The TOPIX also rose, finishing the week about 1.8% higher.

The monetary policy backdrop remained highly accommodative, with Bank of Japan Governor Kazuo Ueda stressing that it was too early to conclude that the central bank had met its 2% inflation target in a sustained manner and continuing to signal that prices rising in tandem with wages was a precondition for any shift in its stance. Consumer inflation, as measured by the core consumer price index, slowed in January to 2.0% year on year from the previous month’s 2.3%.

Although the yen was broadly unchanged for the week (starting and ending at around JPY150.5 against the U.S. dollar), historic weakness in the Japanese currency provided a favorable backdrop for share price gains, particularly in the case of Japan’s exporters, due to the revenues they derive from overseas. The yield on the 10-year Japanese government bond moved little during the period, settling at approximately 0.71%.

Stocks in China rose on hopes that Beijing may boost monetary easing measures to stimulate growth. The Shanghai Composite Index gained 0.74%, while the blue chip CSI 300 added 1.38%. In Hong Kong, the benchmark Hang Seng Index gave up 0.82%, according to FactSet.

February’s economic data continued to paint a mixed outlook for China. The official manufacturing purchasing managers index fell to 49.1 in February from 49.2 in January—remaining below the 50-mark threshold separating growth from contraction—due to declines in production and exports. Seasonal factors also contributed to weakness as factories were closed for the Lunar New Year (LNY) holiday from February 10 to February 19. The nonmanufacturing PMI rose to a better-than-expected 51.4 from 50.7 in January. On the other hand, the private Caixin/S&P Global survey of manufacturing activity edged up to 50.9 in February, beating expectations and marking its fourth month of expansion.

The latest results showed no letup in China’s property crisis despite Beijing’s efforts to salvage the troubled sector, which increased pressures on policymakers to ramp up support. On Friday, Chinese banks approved more than RMB 200 billion of development loans to be issued under the government’s whitelist mechanism, which aims to inject liquidity into the real estate market to fund unfinished residential projects.

(Sources:  All index- and returns-data from Norgate Data and Commodity Systems Incorporated; news from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, visualcapitalist.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet.)