Market Temperature in the Summer Heat

Mid-year heat check of the market

In no particular order, these are the list I occasionally check.

S&P500

The S&P500 index is down 3.12% since January. The index that is made up of US’ 500 largest companies has bounced back nearly 40% from its low in the pandemic-induced crash in March. The index is about 8% away from its all-time high February record.

NASDAQ

The NASDAQ is up 13.76% since January. The index made up of the 100 biggest non-financial members  has hit several all-time highs so far this year despite the ongoing pandemic. This is the third time that the tech-heavy index pierced through its all-time high level since June. The index has rallied 48.8% from its March low.

UNEMPLOYMENT RATE

The current unemployment rate is at 11.1%. The rate for the month of June has remained over 10%—levels not seen since during 1980’s recession—but has been celebrated as a great improvement from just its predecessors 14.7% in April and 13.3% in May.

GDP GROWTH RATE

The rate of gross domestic product or the total value of goods and services produced in the US is -5% in the month of June. This is the third consecutive month that the GDP has contracted. In April, GDP fell by 4.8% and another 5% drop in May.

A recession is typically defined as two consecutive quarters of negative GDP growth.

The private research organization, National Bureau of Economic Research (NBER), has determined that the US entered recession in February.

OIL PRICE

West Texas Intermediate has settled at $40.32 a barrel—56% lower from where it was at the start of this year. Nonetheless, it has nearly doubled from its pandemic-low of -$40.32 a barrel.

COPPER

The price of Dr. Copper as the predictor of the overall health of the global economy has settled at $6,022.65 per ton—a small difference from where it was at the start of the year. The metal price has climbed 23% from its year low that took place in the March panic.

REGULAR GAS PRICE

Gasoline prices $2.17 a gallon day before the July 4th weekend. The price has recovered nearly 20% from its March bottom of $1.74 a gallon but is still down from the $2.60 a gallon in January.

US RETAIL SALES

Current US retail sales registered a strong 17.7% growth in the month of May. The US economy registered this record number after logging a weak 16% drop in the month prior.

DELINQUENCY (as of June 15, 2020)

DELINQUENCY RATE ON SINGLE FAMILY RESIDENTIAL MORTGAGES

Despite the mandatory lockdowns, delinquency in single family homes has reached its lowest in more than a decade at 2.33%.

DELINQUENCY RATE ON COMMERCIAL AND INDUSTRIAL LOANS

Delinquency on commercial and industrial loans has remained flat in the past year at 1.12%.

DELINQUENCY RATE ON CREDIT CARD LOANS

Credit card delinquency rose by 16 basis points to 2.73 in the past 12 months.

PUT CALL RATIO

A ratio where higher than a value of one indicates bearish sentiment has registered 0.87 per its latest reading—compared to 0.85 at the start of the year, and more than 1.25 during the March panic.

AAII INVESTOR SENTIMENT SURVEY (as of July 1, 2020)

BULLISH: 22% (historical average: 38%)

NEUTRAL: 32% (historical average: 31.5%)

BEARISH: 45.9% (historical average: 30.5%)

VOLATILITY

Volatility or VIX is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility (Investopedia).

VIX has fallen 66.5% from its March high to its current 27.68. 

FACTSET EARNINGS EXPECTATIONS

FactSet has recently reported that it sees a record-high cuts in earnings-per-share (EPS) estimates of the S&P500 companies this second quarter. The financial research firm sees a historical 37% drop in EPS this second quarter.

FORWARD PRICE EARNINGS

RBC research firm sees a 22 times forward earnings in the S&P500—its highest in almost two decades. This indicates that the current value of the market is overvalued compared to its expected earnings in the coming year.

S&P500 DIVIDEND YIELD

The broader index S&P500’s dividend yield has remained near flat at 1.96% when compared to its previous year’s value of 2%

GOLD AKA SAFE HAVEN INVESTMENT

Gold has seen its value appreciate so far this year. At $1,775.30 an ounce, the safe haven asset with no dividend and earnings quality has not seen this price level since late 2012. Gold price is up about 25% in the past year alone.

YIELD CURVE

The recent mortgage rate lows has not crimped the yield curve anywhere near its recessionary characteristics ie inversion. The yield curve has remained positively slope as of recent.

BITCOIN

The faux safe haven currency registered at $9,063.36 per digital price. The digital asset was not spared in the March panic as it dropped alongside the cash markets but has recovered a healthy 14% rate since.

GOOGLE MOBILITY (SELECTED DATA as of June 27, 2020)

RETAIL & RECREATION: -19%

GROCERY & PHARMACY: -1%

WORKPLACES: -12%

Per Google, the baseline day is the median value from the five‑week period Jan 3 – Feb 6, 2020.

Amidst of these data, it appears that the overall US consumer economy has remained steadfast despite the pandemic. Delinquency rates has remained manageable and the banks have already set aside cash for provisions early on should this tranquility turns south.

Meanwhile, the forward looking market has never been this overpriced in the recent history, and investors should be satisfied should the S&P500 remain flat for the rest of the year in contrast to what the volatility index has indicated. In addition, the widespread bearish sentiment that individual investors reflect on the surveys justifies the safe haven’s price appreciation not seen since the early part of this decade.

In summary, the outstanding growth in consumer spending amidst the broad lockdowns implemented in the first quarter and as what is reflected in the mobility numbers displays the resiliency of the US economy.

Data reported here are gathered from the following sources: Markets Insider, Trading Economics, Bloomberg, Gas Buddy, IEA, AAII, Google, Federal Reserve Bank of St. Louis, CBOE, FactSet, CNBC, Y CHART, The American Association of Individual Investors

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