Investors did a pretty good job of wiping out about $700 billion in market cap from the S&P 500 on Friday. I’m not sure what the correct multiple should be for what amounts to roughly $165 billion in tariffs per year. Of course, that is assuming that all $550 billion in China exports to the US goes to a 30% tariff rate. However, the sell-off seems a bit overdone to me.
The Road To Nowhere
Whatever the case, the S&P 500 is now down about 1% from its January 26, 2018, levels, and about 6% off its all-time high. I think the more important number here is the 1% because it signifies just how the market has gone nowhere over the past 21 months.
It isn’t the lack of performance that is exhausting; it is the volatility.
I usually don’t reference Bollinger Bands much, but I love to use the Bollinger Bands width as a measure of volatility. Naturally, when the bands are expanding volatility is rising, and when the bands are contracting volatility is falling. The good news is that the Bollinger bands current width is at the upper of the historical range. It would at least suggest that volatility is likely to settle down.
Meanwhile, the RSI is still generally trending higher, since the December lows, another positive for the longer-term. But it does also suggest that there could be just a bit more downside over the short-term.
Percent of Stocks
Also, the percent of stocks in the S&P 500 above their 200-day moving average is right around 50%. Which, as you can see from the chart below is a pretty significant level.
Also, it is worth noting that VIX never got to levels that we saw at the beginning of the month.
Additionally, the 10-year bond stayed above its previous lows.
Gold and TLT
Meanwhile, Gold failed to make a new high, and the TLT has now made a lower high.
Risk Aversion Trade?
It would all kind of continue to suggest that the risk-off trade is still slowly unwinding. Friday was a snapback of sorts. But again, I continue to believe that the reason for the S&P lackluster performance over the past 21 months and below average PE ratio is a result of the trade war. Therefore, the trade war has been effectively priced in.
Earnings Trends Are Healthy
From everything I can tell, trends for earnings continue to remain stable. Since June 4, when I first started modeling my own S&P 500 earnings estimates, 2019 estimates have dropped 1% to $162.90, while forecasts for 2020 have fallen by almost 2% to $179.68. Over that same time, the S&P 500 is up by about 1.6%, and the PE ratio for 2020 is up to 15.85 from 15.3. From a valuation, perspective equities should still be attractive.
Some companies will be impacted by a continued trade war more than others. However, it is hard to equate precisely what the effect on the market should be. If history serves as a guide, past tariff news has primarily been digested in a swift move lower, followed by a recovery in prices.
As long as valuations remain attractive, equities should have an underlying bid.
Additionally, the spread between the S&P 500 dividend yield and the treasury yield has widened some more as well. Again, over time, this should be supportive of equity prices as well.
Of course, we will need to monitor all these levels mentioned above closely on Monday. But the sell-off on Friday seems to be reasonably normal. While the good news is that nothing seems to have moved into a new trading range.