The following is an excerpt from Zacks Chief Strategist John Blank’s full Sep Market Strategy report To access the full PDF, click here
I. U.S. Markets
Yes, this bull has run to a record length.
Yet, I argue -- in a quantifiable way -- for more share returns, even now. To support that bullish statement, I provide four key points to all traders and investors in U.S. stocks this fall. Each demonstrates a key underlying financial strength behind this bull market. Each chart is from Zacks Research System.
Point One shows Annual Earnings Revisions to Index Price Action (dark blue line). The S&P500 index price spike early this year coincides with the U.S. corporate profit tax cuts. It also shows this: Annual fundamental earnings growth support is there to YE 2019 (the red line).
Point Two: In addition, the corporate profit tax cut took down the S&P500 benchmark forward 12-month Price to Earnings (P/E) ratio from over 21.0 late in 2017 to 17.5 this year. While controversial, taking valuation excesses out of the broad S&P500 stock index, by cutting profit taxes one time, may extend the bull market’s life a year or two.
Point Three: The S&P500 Market Weight (SP5M) Index Scorecard Compared to the S&P500 Equal Weight (SP5E) Index
Carefully review these five S&P500 valuation metrics above: (P/Earnings, P/Free Cash Flow, P/Book, P/Sales, EV/EBITDA). They are on the left-hand side of the above table.
Point Three: A Key Valuation ‘tell’ -- the Price/Sales ratio is lower for Equal Weight (3.1), and higher for Market Weight (3.6). All other valuations are the reverse circumstance.
That is the mega-cap stock FAANG effect. Passing on earnings growth in the +20% y/y range, traders will pay up for sales/revenue growth. i.e. they are bullish on the top line.
Point Four: Yes, the U.S. Treasury yield curve, represented by five lines, are drawing tighter (3-month, 1 yr., 5 yr., 10 yr., 30 yr.). That threatens yield curve inversion, a classic signal of a recession, as the Fed gets too aggressive with Fed Funds hikes.
But yes, ALL of these rates are still lower than they have been in over 20 years prior to a recession. The Fed Funds rate was about 5.0% across the ‘90s. Greenspan went from 1.0% to 5.0% before he reversed in the 2000s.
Circa 2018? This is a very accommodative underlying interest rate structure, still.
II. Global Markets
So far in 2018, it has been a terrible year for international ETFs.
I took a look at YTD returns to August 29th, 2018. What I found is Mexico has gotten slightly better and marked slightly positive returns since a May sampling. Ditto Taiwan. Russia is +6.1%.
That’s it for positive returns on country iShares ETFs I follow. Wow! Pathetic. And scary.
Is this an 8 month long Emerging Markets, non-U.S. financial crisis in the making?
Turkey at -52% returns, Brazil at -26% returns, and Italy at -16% YTD returns are the worst marks. Those are also the worst managed economies. That means this is still a rational stock market, sorting out the true fundamental basket cases from the rest.
What we need to worry about is a “Seen one, seen ‘em all” contagion in ETF returns data. I don’t see that. Yet.
The SPDR World ex-U.S. ETF is down -7.8% YTD. That is a broad stock market correction, not at financial crisis levels.
Confirm the growing U.S. – non-U.S. divergence, by viewing the broad share index benchmark lines below.
Stay vigilant folks. This can get worse, much worse, ramping up under pressure from U.S. trade war tactics.
Happy trading and investing to all!
Enjoy my latest Market Strategy report for September.
Chief Equity Strategist
III. Zacks Sept Sector/Industry/Company Telescope
September is off to a slow start, in terms of Zacks Sector Rankings.
The sole Very Attractive plays are concentrated in Health Care. The Telcos remained strong this month, but fell a notch lower. That is not much in the way of outright bullishness.
All in all, there are signs of neutrality across a wide range of sectors. My one solid thought? The global growth soft spot is becoming apparent across a wider range of businesses out there. Stay on top of that softness. But don’t get too worried to yearend 2018. Trends remain on target for an S&P500 index at 3000 in four months time.
(1) Health Care remains Very Attractive, and is the top Sept. sector. The leader is the Medical Care industry, with aging baby boom demographics on display.
TOP STOCK: Molina Healthcare (MOH - Free Report)
Molina Healthcare, a multi-state health care organization, arranges for the delivery of health care services and offers health information management solutions to individuals and families who receive their care through Medicaid, Medicare and other government-funded programs.
(2) Telcos are an Attractive sector in Sept, down from Very Attractive in August. The Telco Equipment and Telco Services Zacks Industry Rankings are Attractive.
TOP STOCK: AT&T (T - Free Report)
AT&T provides communication, entertainment and internet services to consumers and businesses around the world. In the U.S., the company is the largest pay-TV provider and owns the second largest wireless network.
(3) Info Tech fell to a Market Weight in early September. The Computer-Office Equipment and Telco Equipment niches looked strong. Semis are still solid, but are a tad lower this month.
TOP STOCK: Cypress Semiconductor Corp. (CY - Free Report)
Cypress is a leader in advanced embedded system solutions for the world's most innovative automotive, industrial, home automation and appliances, consumer electronics and medical products.
(4) Consumer Discretionary is back to a Market Weight. The leaders are Home Furnishing-Appliances, Non-food Retail/wholesale, and Apparel. With summer over, Leisure is the severe laggard in August.
(5) Energy is a Market Weight. The leader is Coal. The Oil and Gas industries are neutral, consistent with a flat oil price outlook.
(6) Financials are a Market Weight. The cyclical Insurance stocks are the leader. That is interesting. Major Banks hurt the most here.
(7) Industrials are a Market Weight. The sold Very Attractive industry is Pollution Control, but Railroads and Metal Fabricating are strong too. Airlines look the worst.
(8) Materials are back to a Market Weight. The sole strong spot is Paper.
(9) Utilities are a Market Weight. The Utilities-Gas Distributors are the best here.
(10) Consumer Staples remained Very Unattractive in August. The Agri-business industry niche is the best at Market Weight. Tobacco, Food, and Beverages are terrible, a casualty of the trade war rhetoric.