September 14 – Stock mentions: SPY, EWJ, EWY, ACWI,
Stocks had a solid showing this week, with the S&P 500 finishing the week higher by roughly 1%. For September the index has risen by over 3%. However, the real star this past week was the Russell 2000, which is now up over 5.5% for the month.
Global Growth Trade
As I have been talking about all week in the member area, the sector rotation that has been taking place tells a tale of improving global growth. The top 5 sectors are all part of a global growth trade, with the semis, energy, industrials, and materials, 4 of the top 5. Financials come in at 2 rising by nearly 6% so far this month. Partially that is because of the rising interest and widening spreads we have recently witnessed. But rising rates can also be interpreted as an expectation that the economy is stronger than previously perceived in August.
When digging deeper, we can see critical commodities, such as copper, which has recently broken out of a multi-month down, a significant global growth metal. Should copper rise above $2.70 this week, it has the potential to move up to around $2.80.
Iron ore prices have started to rise once again too, after collapsing in August.
Soybean prices have also been on the rise in recent days, an indication that perhaps China has started to come back into the US markets, as widely spoken about over the past week.
Key export economies stock markets are on the rise. The Korea Kospi rose above a multi-month downtrend and has further to rise before reaching its next level of resistance.
The Japanese Nikkei is on the verge of breaking out too. Japan, like South Korea, is an export-driven economy.
Emerging Markets (EEM)
The emerging markets ETF EEM is also on the cusp of a significant breakout.
The all-world ACWI ETF is all nearing a massive break out.
Fundamentals Still Supportive
When you start pulling all of these facts together, I find it very hard not to be bullish on the equity market. Over the past few days, my view of the equity market has gotten more bullish. I am beginning to believe that we will indeed have a powerful move higher later this year. It may also be the start of the next surge higher in equity prices. Something similar to what we saw in late 2016 through the beginning of 2018. Premium content – The Outlook For Stocks May Be Growing Stronger – Try for the first 2 weeks for FREE! I won’t be insulted if you cancel.
For the first time since the beginning of August, the S&P 500 dividend yield is below that of the 10-Year US treasury. As I have pointed out before these inversions have only occurred on a handful of occasions. Each time it was followed by a massive move higher in equity prices.
Also, just like during past times, the S&P 500 was in a period of sideways consolidation during the inversions. This time has proven no different. Each time the spread between the S&P 500 dividend yield and the 10-year yield began to widen, and return to normal, the S&P 500 broke out and went on a bull run higher.
At this point, the S&P 500 isn’t overvalued either, so the case for the markets rising seems fair. Based on data from S&P Dow Jones, the S&P 500 is trading at roughly 16.6 times 2020 earnings estimates for $181.11 per share. Again, this hardly is expensive when considering earnings growth in 2020 is forecast to be around 12.1% over 2019.
When using my model, I come up with similar numbers with an S&P EPS estimates of $180.03 for 2020, leaving the index trading at roughly 16.7. Additionally, I am modeling earnings of $197.65 for 2021, and growth of about 10% growth over 2020. Based on those earnings estimates, I am projecting an S&P 500 target valuation of 3,360 using an earnings multiple of 17.
It would seem that when using the markets as a guide, along with some underlying fundamentals. The markets may be signaling that a significant rise may be on the way. It may mean that a big run-up in the market is only beginning now.
Have a great Saturday