Is the market overpriced? Well, let’s talk about the pain trade. At present, the pain trade is not being bullish enough. So, FOMO (Fear of Missing Out) meets FOCAV (Fear of Collapsing Asset Values). The struggle looks to be stalling out both camps. So, what is the cyclical index predicting over the next two months and beyond?
From a technical standpoint the CTI (Cyclical Trend Index) is…surprisingly bullish. As valuation concerns, Fed tapering concerns, inflation concerns, and investor fatigue set in, the cyclical trend index fell from a bullish +14 score to +3 this month. If the trend is your friend, the CTI’s declining score projected a bearish -2 leading into December. Yet a reset of sorts has occurred. After a ferocious earnings rebound occurred in 2021, investors needed time to consider the investment landscape post-2021. Certainly, profit margin comparison against 2021 numbers would be more difficult leading into 2022 and 2023. Yet, the Fed continues to remind the investment community it wants to extend the economic expansion, not kill it.
Slowly, institutional investors are beginning to come around to the idea that peak profit margins in the 3rd quarter do not signal the end of the economic expansion. Yes, supply-chain problems, higher fuel prices and the lack of computer chips are expected to pressure some sectors for a while; however, these problems should abate. In fact, economic growth should continue to advance, even if at a more realistic pace, post-COVID and for years to come.
Abbey Joseph Cohen, a senior analyst for Goldman Sachs, reminded reporters on Bloomberg Surveillance recently that:
- Supply-chain problems will abate.
- Increased wages may become embedded in the economy as people go back to work; however, this is the result of an economic expansion.
- Cohen suggests remaining calm as the fear dynamics of inflation will be offset by several factors. Here they are:
While the Federal Reserve Board facilitated fiscal spending support equal to 9% of U.S. GDP last year, this number has already fallen to 1% this year and is expected to be -2% in 2022. Moreover, the employment participation rate in the United States remains dramatically lower than it was pre-pandemic. To illustrate, in January of 2021, the total number of natives and immigrants not working, unemployed or not in the labor force was 67.5 million. That’s 7.8 million more than in January of 2020. Meanwhile, millions of Baby Boomers are retiring and exiting the labor force completely. In addition, millions of women have decided to remain at home with their children. China is another problem for the world’s economy as Chinese GDP is decelerating.
In summary, the S&P 500 currently trades at a multiple of 21.18 times Dr. Ed Yardeni’s estimate of $220 in earnings for 2022. His estimate for the S&P 500 earnings in year 2023 is $235. Since there is a strong relationship between multiples and interest rates, as long as Treasury yields stay low, multiples can sustain these lofty levels.
Thank you for your continued faith and support of all we do here to advance your net worth, peace of mind and retirement needs. As usual, if you have any questions or have knowledge of people who, like yourself, need the assistance of an experienced financial management team, inclusive of our broker/dealer team in Bolton, MA and Miami, FL, do let me know.
Vaughn Woods, CFP, MBA
Vaughn Woods Financial Group, Inc.
2226 Avenida De La Playa
La Jolla, CA 92037
The Leuthold Group
Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views of Bolton Global Capital or Bolton Global Asset Management. The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0269.