December 2019 MMI Report
A Bull is a Bull.
December 2019 MMI Report
If it looks like a bull, acts like a bull, runs like a bull, then it is probably a bull market. Our indicators are registering at their highest, most bullish levels since 2009. A S&P 500 fair value of 4,000 in 2020 is supported by our comparative asset valuation analysis.
Fueled by three interest rate cuts, upward revisions in key economic data including GDP, significant progress in the trade war with China, a soft QE 4, a normalization of the yield curve, U.S. equities should trend significantly higher over the next 12 months.
Our proprietary MMI Indicator scores a 69.5 out of 100, a very bullish score. This reading is the highest score we have seen for this decade.
Contrarian sentiment indicators have reversed and become more moderately positioned after a few weeks of upside in the markets.
The VIX is registering a reading of 12, reflecting an utter lack of fear. However, other indicators recently have moderated, becoming more fearful. The S&P 100 put-to-call ratio stands at 1.27 to 1 and the- bull-to-bear ratio stands at 0.90. Although slightly bearish, this reading is recently down from higher levels, showing a tempering of enthusiasm.
Technical Indicators: Bullish
New highs dominate new lows by nearly a five to one margin and all major U.S. equity market indices are above their 200-day moving averages, perhaps barely overextended by 5 to 7%. The 10-day moving average volume and breadth of the advance / decline indicator for the NASDAQ and NYSE were 1.42 to 1 and 1.22 to 1, mildly bullish scores. However, last week’s advance-decline volume and breadth for the NYSE and NASDAQ were negative. This result may indicate the market may be ripe for a brief sell-off which would provide an entry point for many playing catch up this year.
Liquidity Indicators: Bullish
Capital inflows have surged to a positive $27 billion, led by mega-mergers like Tiffany's (TIF) and Moet Hennessy – Louis Vuitton (LVMH) and Novartis (NOV) and Medicines Co. (MDCO), both acquired in all-cash deals. Also, there is still plenty of cash on the sidelines as money market balances exceed 11% of the total market cap, with over $3.6 trillion, earning negative real returns. Meanwhile, margin account debit balances have declined in 2019, showing a temperate approach to equities.
It is instructive to know that while cash inflows into equity funds are net neutral to outflows, flows into bond funds and have attracted over $22 billion in November. Investors are tiptoeing up the risk spectrum into bonds rather than equities.
Valuation Indicators: Bullish
Our indicators support an S&P fair value of over 4,000. This forecast is produced from a combination of 10% earnings growth estimated in 2020 and a 20% expansion of market P/E multiples. The S&P 500 earnings yield is still relatively cheap in relation to bond yields, the earnings yield is approximately 4.5% versus 3.4% on medium grade corporate bonds. Unless interest rates rise, using our equity earnings yield based on 2019 estimates, the equity market reaches a fair valuation at parity with the bond yield, adjusted for a 10% discount for risk over the next 12 months, producing a P/E ratio of 23 as a fair value. A cross reference using absolute value data measures shows the equity markets at a slight premium of about 11% to tangible business value per the most recent Z report from the Fed. At 1.45 times nominal GDP, U.S. equity markets are valued well below the peak of 2.2x reached in 2000. A PEG ratio analysis shows the market undervalued at 2.1x versus a historical average of 2.6 times. The Wall Street consensus targets the S&P at 3,387, up 9% from current levels.
Earnings Momentum Indicators: Neutral
This quarter will likely represent the third consecutive negative growth quarter for earnings. This outcome was last achieved in late 2015 through early 2016, another mini bear market period.
The tide may be turning to the upside as better-than-expected earnings reports have topped misses by a 3-to-1 ratio. Also, 2020 earnings growth is expected to increase approximately 10%, supporting a S&P 500 aggregate estimate for earnings of $179. The street consensus target is obtained by applying an 18 P/E ratio to the 2020 S&P 500 EPS estimate.
Monetary Policy: Bullish
Our excess liquidity indicator is positive 134 basis points. This result shows the FED is in a similar mode for injecting more liquidity via monetary stimulus, adjusted for velocity versus the current GDP growth rate.
The yield curve term spread ratio is .9 to 1, comparing 1-year treasuries to 10-year treasuries, showing a renormalization of a positive yield curve.
Our forward rates data is flat, meaning no further rate cuts are implied at this time. Our high yield to treasury spread indicator is slightly bearish at a 339 basis point premium (400 bps is parity). This low premium is instructive, underscoring the flood of capital into bonds rather than equities.
Interestingly, the Leading Economic Indicators series (LEI) has been negative for three months in a row. The last time this occurred was during the mini bear market bottom of December 2015 through February 2016. This bear market was followed by a 40% run from 2016 to September 2018.
Currently, we believe the largest systemic risk to the market continues to be from the fear of a re-emergence of a U.S.-China trade war, the continuation of no economic growth, a possible recession in Europe, an ongoing political stalemate, or stalling stimulative economic policies in the U.S.
We wish you a happy holiday season. Santa may be arriving early this year!
Robert Maltbie, CFA
Singular Research, President
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