Nesso Insights

Market and Economic Opinion

February 2019


State of the Market

The stock market is significantly overvalued, probability of positive returns diminishing. Expect the market to become range bound, moving sideways. 

State of the Economy

Economic growth for the US has been strong but may be plateauing.

Recommendation

Risky investments, sensitive to stock market volatility, should be reduced. Increase positions in large multinational dividend stocks. Prepare, in the coming months, for possible reduction in the equity asset class and increase cash positions.


Summary of Indicators

  • Bullish
  • Caution
  • Bearish

Market Analysis:

  • U.S. Treasury Yield Curve
  • Market Valuation - Shiller P/E
  • Total Market Cap Vs U.S. GD

Economic Analysis:

  • LEI Economic Index
  • New Home Sales

Supporting Material

U.S. Treasury Yield Curve:

An inverted yield curve has predicted 7 of the last recessions

As demonstrated in the below chart, the two treasuries differ by 0.2%. Investors should take caution in initiating new equity positions. 

10 Yr Treasury Minus 2 Year Treasury

Market Valuation - Shiller P/E:

The Shiller P/E  helps determine if the market is valued fairly based on reported earnings. 

Shiller P/E: 30.8 ( %)
Shiller P/E is 82.2% higher than the historical mean of 16.9
Implied future annual return: -2.2%

Shiller P/E

Total Market Cap Vs U.S. GDP
As pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”
As of today, the Total Market Index is at $ 28902.9 billion, which is about 138.3% of the last reported GDP. The US stock market is positioned for an average annualized return of -1.5%, estimated from the historical valuations of the stock market. This includes the returns from the dividends, currently yielding at 1.87%.

Total Market Cap and US GDP

New Home Sales:
A drop in new home sales has indicated recessions in the past.
New home sales have dropped from 656 to 607 by the end of Q3 2018. This does not break the long term tend but places emphasis on the upcoming data points. 

New Home Sales

The Conference Board Leading Economic Index (LEI):
A composite economic index designed to signal peaks and troughs in business cycles.
The Conference Board Leading Economic Index® (LEI) for the U.S. was unchanged in January (according to new estimates), remaining at 111.3 (2016 = 100), following a  0.1 percent decline in December, and a  0.1 percent increase in November.