The very big picture (a historical perspective): The CAPE is now at 32.98 – down this week 3.06% from last week’s value of 34.02.
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. In the past, the CAPE ratio has proved its importance in identifying potential bubbles and market crashes. An extremely high CAPE ratio means that a company’s stock price is substantially higher than the company’s earnings would indicate and, therefore, overvalued. It is generally expected that the market will eventually correct the company’s stock price by pushing it down to its true value. The historical average of the ratio for the S&P 500 Index is between 15-16, while the highest levels of the ratio have exceeded 30. The record-high levels occurred three times in the history of the U.S. financial markets. The first was in 1929 before the Wall Street crash that signaled the start of the Great Depression. The second was in the late 1990s before the Dotcom Crash, and the third came in 2007 before the 2007-2008 Financial Crisis.
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. https://www.multpl.com/shiller-pe
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 71.35, down 5.47% from the prior week’s 75.48. We’ve been in a cyclical Bull Market since April 21, 2023.
The shorter term picture:is (typically) the weeks to months long timeframe. GALACTIC SHIELD — POSITIVE entering (Q2), indicating positive prospects for equities in the second quarter of 2024. This indicator is based on the combination of U.S. and International Equities trend statuses at the start of each quarter. STARFLUX— POSITIVE and ended the week of 4/19/24 at 1.34 (down 0.1). This short-term indicator measures U.S. Equities. STARPATH — POSITIVE. This indicator measures the interplay on dual timeframes of our Type 1s + the Russell 3000 + our four most ‘pro-cyclical’ Type 3s, vs. Cash.
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
THIS WEEK IN THE MARKETS
U.S. Markets: MANUFACTURING PICKS UP FOR FIRST TIME IN MONTHS IN CHINA AND U.S.. Stocks recorded their third consecutive week of broad losses, as concerns over tensions in the Middle East and the possibility of U.S. interest rates remaining “higher for longer” appeared to weigh on sentiment. Mega-cap technology shares lagged as rising rates placed a higher theoretical discount on future earnings. A first-quarter revenue miss from advanced chipmaker supplier ASML Holdings also seemed to weigh on the sector and on general optimism toward companies with artificial intelligence (AI)-related earnings, according to traders. Small-caps continued to struggle, pushing the small-cap Russell 2000 Index further into negative territory for the year-to-date period.
The trading week started off on a strong note, which traders believed to be driven by relief that Iran’s well-telegraphed retaliatory strike on Israel did not result in worst-case scenarios, with nearly all missiles fired into the country intercepted by air defenses. However, hopes that Israel would carry out a measured response faded alongside stock prices as reports surfaced that the Israeli war cabinet had decided to retaliate “clearly and forcefully.” On Friday, stocks headed lower again, after Israel conducted strikes on air defense facilities within Iran, as well as on Iran-backed groups in Iran and Iraq.
Looking at the US Indexes: The negative momentum continued across the board this week for the below indexes, with the S&P 500 losing well over 4 percent and the Nasdaq declining a staggering 5.5%. The Dow narrowly escaped losses while small and mid-cap both suffered more than 2 percent losses for the trading week.
The Dow Jones Industrial Average (DJIA) is the oldest continuing U.S. market index with over 100 years of history and is made up of 30 highly reputable “blue-chip” U.S. stocks (e.g. Coca-Cola Co., Microsoft). The Dow slowed its loss streak this week with a narrow miss and the only index from the above list to avoid any loss. This week, the DJIA, gained a slim 0.01% to end the week of Apr 19 at 37,986.40 vs the prior week of 37,983.24.
The Nasdaq Composite Index tracks most of the stocks listed on the Nasdaq Stock Market – the second-largest stock exchange in the world. Over half of all stocks on the NASDAQ are tech stocks. After a near half-percent loss last week, the tech-driven Nasdaq took on a considerable downward turn this week, reporting losses of -5.52%, closing at 15,282.01 vs. the prior week of 16,175.09. YTD growth is now sub-5%.
The S&P 500 large-cap index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The S&P 500 is regarded as one of the best gauges of prominent American equities’ performance, and by extension, that of the stock market overall. Another down this week for the S&P 500, this time with a near four-an-a-half-percent slip, the large-cap index declined –4.36%, closing at 4,967.23 vs last week’s close of 5,193.56.
The S&P 400 mid-cap index is the benchmark index made up of 400 stocks that broadly represent companies with midrange market capitalization between $3.6 billion and $13.1 billion. It is used by investors as a gauge for market performance and directional trends in U.S. stocks. The S&P 400 mid-cap continued the downward momentum this week, declining -2.17% after its almost 3% slip last week. It closed this week at 2,836.88 vs last week’s 2,899.72.
The Russell 2000 (RUT) small-cap measures the performance of the 2,000 smaller companies included in the Russell 3000 Index. The Russell 2000 is managed by London’s FTSE Russell Group and is widely regarded as a leading indicator of the U.S. economy because of its focus on smaller companies that focus on the U.S. market. For the third week in a row, the Russel 2000 saw nearly 3% losses, declining this time by -2.77% and closing at 1,947.66 vs last week’s close of 2,003.17. RUT is now displaying a negative year-to-date loss of -3.24%.
U.S. Commodities/Futures: Gold, silver, and copper all enjoyed a strong week of gains while the indexes struggled. Copper was the leader last week with almost 2% gains, and again this week with double that. Crude Oil ended this week on a decline, dropping over 2.5% by market close on Friday.
VIX closed at 18.71 this week, a 8.09% increase over last week’s close of 17.31. This continues to be a possible indication that there’s more demand and options prices may continue to increase.
International Markets:
THIS WEEK IN ECONOMIC NEWS
U.S. Economic News: CONSUMERS CONTINUE SHOPPING, BUT HOUSING MARKET SHOWS SIGNS OF STRESS. Some strong economic data appeared to increase worries that the Federal Reserve would push back any interest rates cuts to the fall, if not to 2025. On Monday, the Commerce Department reported that retail sales rose 0.7% in March, well above consensus expectations of around 0.3%, while February’s gain was revised upward to 0.9%. Rising gas prices were partly at work (the data are not adjusted for inflation), but the strength was broad-based and included healthy gains in discretionary categories, such as restaurants and bars and online retailers.
Conversely, downward surprises in housing market data may have furthered inflation fears by auguring continued supply tightness. Housing starts and permits in March came in well below expectations and declined from February, with the former falling to the lowest level in seven months. Existing home sales also declined, although largely in line with expectations, as the average 30-year mortgage rate climbed above 7% for the first time since December.
FED SIGNALS RATE CUTS WILL WAIT IN RESPONSE TO DATA. As was the case the previous week, Fed officials expressed their concern with recent economic data. On Tuesday, Fed Chair Jerome Powell stated at an economic conference that “recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence.” On Thursday, New York Fed President John Williams warned that a rate hike is not the baseline, but that one is possible if the data warrants. Atlanta Fed President Raphael Bostic said that policymakers would not be in a position to cut rates until the end of the year.
The retail sales data helped push the yield on the benchmark 10-year U.S. Treasury note to its highest intraday level since early November. (Bond prices and yields move in opposite directions.) Municipal bond yields also increased in the first half of the week alongside a flood of new issuance, but they held in well relative to Treasuries later in the week as most of the new deals were met with strong demand.
In the investment-grade corporate bond market, issuance was relatively light but met expectations, and most issues were oversubscribed. However, the higher-for-longer rates narrative and geopolitical tensions weighed on the high-yield bond market, and traders noted that trade volumes were somewhat above average as more sellers appeared to be active and high-yield funds industrywide reported negative flows.
International Economic News: In local currency terms, the pan-European STOXX Europe 600 Index ended 1.18% lower as tensions rose in the Middle East. Major stock indexes were mixed: Germany’s DAX fell 1.08%, Italy’s FTSE MIB gained 0.47%, and France’s CAC 40 Index was little changed. The UK’s FTSE 100 Index declined 1.25%. European government bond yields broadly climbed.
UK INFLATION, WAGE GROWTH SLOW SLIGHTLY LESS THAN FORECAST. Consumer prices in the UK grew an annual 3.2% in March, down from 3.4% in February. Although the inflation rate fell to its lowest level in two and a half years, the decline was slightly less than forecast by analysts and the Bank of England (BoE) due to elevated price growth in fuel and communication goods. Services inflation—a measure of underlying price pressures that is watched closely by the BoE—remained high but slowed to 6.0% from 6.1%.
Wage growth also slowed less than expected in the three months through February. Excluding bonuses, pay increased 6% year over year, down from 6.1% in the preceding period. The unemployment rate rose sharply to 4.2% in February from 3.9%. Job vacancies continued to decline in the first quarter.
BOE’S BAILEY: INFLATION IS RECEDING. Higher oil prices and the somewhat sticky inflation data prompted financial markets to push out expectations for a first cut in UK interest rates from June to sometime in the fall. In contrast, BoE Governor David Bailey sounded more upbeat. “In the UK, we’re disinflating at what I call full employment,” he said at the International Monetary Fund’s (IMF) annual meeting. “I see, you know, strong evidence now that that process is working its way through.”
ECB POLICYMAKERS STICK WITH JUNE RATE CUT, BUT OIL IN FOCUS. A slew of European Central Bank (ECB) policymakers at the IMF meeting reiterated that June was the likely target date for lowering borrowing costs, barring unexpected economic shocks. ECB President Christine Lagarde declined to say whether there might be more than one reduction in rates. In an interview with CNBC, she argued that policy should still depend on incoming economic data, given high levels of uncertainty. She added that the ECB would monitor oil prices “very closely” amid worries about conflict in the Middle East. In an interview with Bloomberg, Governing Council member Martins Kazaks also highlighted the uncertainty but added that the three to four rate cuts this year priced in by markets were in line with the bank’s economic outlook.
JAPAN: Amid an escalation in tensions in the Middle East, Japan’s stock markets suffered sizable losses over the week. The Nikkei 225 Index was down 6.2%, and the broader TOPIX Index lost 4.8%. An additional factor weighing on the markets was some concern about waning AI-related demand.
In fixed income, the yield on the 10-year Japanese government bond closed the week at around 0.84%, broadly unchanged from the prior week. Bank of Japan Governor Kazuo Ueda echoed previous comments in stating that, if weakness in the yen exerts significant upward pressure on inflation, a rate hike may be warranted.
NO INTERVENTION TO PROP UP THE YEN, AS AUTHORITIES CONTINUE TO TREAD CAREFULLY. In the foreign exchange markets, the yen, perceived as a safe-haven currency especially in times of geopolitical turmoil, strengthened on the final trading day of the week. It nevertheless continued to hover around 34-year lows and finished the period in the mid-JPY 154 against the U.S. dollar range, from the low-JPY153 range at the end of the previous week.
While speculation continued about Japanese authorities potentially intervening in the currency markets to prop up the yen, no such move was forthcoming. However, U.S., Japanese, and South Korean leaders met to discuss current conditions in the foreign exchange markets, focusing on the recent sharp depreciation of the Japanese yen and the South Korean won.
HISTORIC YEN WEAKNESS PROVIDES TAILWIND FOR EXPORT GROWTH. Japan’s exports rose 7.3% year on year in March, slightly slower than the 7.8% gain registered in February. The data print nevertheless marked the fourth consecutive month of growth in exports, attributable to the boost provided to Japan’s exporters by historic weakness in the yen. Signs of a pickup in Chinese demand also lent support.
In other economic data releases, the core consumer price index (CPI), a leading indicator of nationwide trends, was 2.6% higher year on year in March, slightly lower than had been expected and down from a revised 2.8% in February. While suggesting that price pressures could be easing somewhat, data showing that Japan’s inbound tourism grew solidly in March, driven by an increase in visitors from South Korea and China, is likely to support services inflation.
CHINA: Chinese equities rose after the economy expanded more than expected in the first quarter. The Shanghai Composite Index gained 1.52%, while the blue chip CSI 300 added 1.89%. In Hong Kong, the benchmark Hang Seng Index gave up 2.89% as escalating geopolitical tensions in the Middle East hurt investor sentiment.
China’s gross domestic product expanded an above-consensus 5.3% in the first quarter from a year ago, accelerating slightly from the 5.2% growth in last year’s fourth quarter. On a quarterly basis, the economy grew 1.6%, rising from the fourth quarter’s 1.4% expansion.
However, other data provided a mixed snapshot of the economy. Industrial production rose a lower-than-expected 4.5% in March from a year earlier, down from 7% growth in the January to February period. March retail sales grew a lower-than-expected 3.1% from a year ago as catering and auto revenue slowed after the Lunar New Year Holiday. Meanwhile, fixed asset investment rose more than forecast in the first quarter from a year ago, although property investment fell 9.5% year on year. The urban unemployment rate eased slightly to 5.2%, while the youth jobless rate stayed at 15.3% in March, unchanged from February.
On the monetary policy front, the People’s Bank of China injected RMB 100 billion into the banking system via its medium-term lending facility compared with RMB 170 billion in maturing loans and left the lending rate unchanged, as expected. The operation resulted in a net withdrawal of RMB 70 billion from the banking system, marking the second cash extraction this year.
Sources: All index and returns data from Norgate Data and Commodity Systems Incorporated and Wall Street Journal. 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, Morningstar/Ibbotson Associates, Corporate Finance Institute.
