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We have reached a critical inflection point: where thinking about financial market cycles is a gripping trader and investor topic.
Let’s do a deeper dive into key relationships.
A. U.S. Markets
Cycle indicators to think harder about!
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
(1) The Top Panel:
This shows you James Tobin’s Q and Robert Shiller’s P/E ratio.
The Q ratio, also known as Tobin's Q: This equals the market value of a company divided by its assets' replacement cost.
This U.S. stock market valuation ratio is currently at 1.6. This is equivalent to stock market valuations seen from 2003 to 2007 and from 2014 to 2019.
The Shiller P/E ratio for the S&P500 index: This is a price to earnings ratio based on average inflation-adjusted earnings from the previous 10 years. It is also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio).
It is currently at 32.65. The peak seen in April-June 2000 was 42.76. A low seen in COVID shutdown period from April-June 2020 was 27.69.
In sum, these two broad U.S. stock market valuation ratios are lower now.
But this is still not a very cheap broad U.S. stock market.
(2) The Middle Panel:
This shows you the Equity Risk Premium (ERP), the Bank of America- Merrill Lynch U.S. AAA Effective Bond Yield, and the LIBOR 3M Interest Rate.
Currently, the ERP is 4.56%. This is an ERP return equivalent to 2003 to 2007 and from 2017 to 2019. That amount of underlying earnings upside to U.S. stocks is OK. Not great.
AAA effective yield is 3.63%. Lower than 2003 to 2006. But equivalent to 2013 to 2019.
LIBOR 3M Rate is 1.47%. Equal to 2002 to 2004. Much lower than 2006 to 2007. Not as high as 2018 to 2019.
In short, the spread between the ERP and effective high grade corporate bond yields in the USA has narrowed considerably, vis-à-vis 2009 to 2019.
But this broad stock-bond return spread it is roughly similar to the cycle pattern seen in 2009 to 2009.
(3) The Bottom Panel:
This shows you U.S. Taxes on Corporate Income and the U.S. Inventory Valuation Adjustment.
Corporate Taxes are coming in at $469.8B. This amount of profit tax payment is similar to cycle highs seen in 2014-15 and 2006. Underlying U.S. corporate profit margins are very strong indeed.
Inventory Valuation Adjustment: This is at lows not seen in earlier data, going back two decades.
This is pressuring consumer prices to stay higher.
B. Zacks July Sector/Industry/Company Telescope
The latest Zacks Industry Rankings offer us two Attractive sectors. Again, an enduring top sector is Energy.
These industries maintain ongoing strength from $100+ oil a barrel, but U.S. Henry Hub natural gas prices have fallen dramatically.
A major Energy/Oil stock selloff has taken place.
Underlying Energy Sector fundamentals are sagging now.
Health Care also remained Attractive. The Medical Care industry remains solid. In Materials, Steel and Paper remain Attractive industries, but the overall Materials sector declined in status.
Utilities stayed on as a Market Weight. Water Supply is the best here. In Financials, Banks & Thrifts looked good, but the overall sector declined, as recession loss worries build up.
Info Tech remained at Unattractive sector in July. Electronics and Office Equipment keep market ratings. Semis fell. There is worry about the Semi sector traditionally overbuilding.
Both Consumer Staples and Consumer Discretionary rose a notch to Unattractive from Very Unattractive. They show us the negative influences of high consumer prices and rates.
(1) Energy stays the top sector, but fall to Attractive from Very Attractive in July. Tops is the Oil Misc. industry. Integrated and E&P stay on as great industries here too.
(4) Industrials remained at Market Weight. Metal Fabricating and Pollution Control remain as the best. Transport, Construction-Building Services, and Aerospace were at Market Weight.
(5) Communications Services rose to Market Weight from Very Unattractive. Telco Equipment is now Attractive. Telco Services continues to struggle, in the latest Zacks Industry Ranks.
(6) Utilities stay at a Market Weight. Utilities-Water Supply and Utility-Telephone are leaders.
(7) Financials remained at Unattractive. Banks & Thrifts stay the best. Insurance and Real Estate are a Market Weight. Other groups fall below that, mostly on recession loss worry.
(8) Info Tech remains Unattractive. Electronics-Semis and Computer-Office Equipment are the best at Market Weight. Misc. Tech and Computer-Software Services get downgraded.
(9) Consumer Discretionary rose to Unattractive from Very Unattractive. Leisure Services, along with Home-Furnishing and Autos/Tires/Trucks held up the best, at Market Weight. Fewer very poor groups, this month compared to last month.
(10) Consumer Staples rose to Unattractive from Very Unattractive. Bullish outlier is Agri-business (commodity prices). Poor stances for Tobacco, Soaps & Cosmetics, and Food/Drug Retail.
C. Conclusion
That’s it for me.
Enjoy the entire Zacks July Market Strategy Report.
Warm Regards,
John Blank, PhD. Zacks Chief Equity Strategist and Economist
See More Zacks Research for These Tickers
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Financial Market Cycles: Zacks July Market Strategy
The following is an excerpt from Zacks Chief Strategist John Blank’s full Jul Market Strategy report To access the full PDF, click here
We have reached a critical inflection point: where thinking about financial market cycles is a gripping trader and investor topic.
Let’s do a deeper dive into key relationships.
A. U.S. Markets
Cycle indicators to think harder about!
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
(1) The Top Panel:
This shows you James Tobin’s Q and Robert Shiller’s P/E ratio.
The Q ratio, also known as Tobin's Q: This equals the market value of a company divided by its assets' replacement cost.
This U.S. stock market valuation ratio is currently at 1.6. This is equivalent to stock market valuations seen from 2003 to 2007 and from 2014 to 2019.
The Shiller P/E ratio for the S&P500 index: This is a price to earnings ratio based on average inflation-adjusted earnings from the previous 10 years. It is also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio).
It is currently at 32.65. The peak seen in April-June 2000 was 42.76. A low seen in COVID shutdown period from April-June 2020 was 27.69.
In sum, these two broad U.S. stock market valuation ratios are lower now.
But this is still not a very cheap broad U.S. stock market.
(2) The Middle Panel:
This shows you the Equity Risk Premium (ERP), the Bank of America- Merrill Lynch U.S. AAA Effective Bond Yield, and the LIBOR 3M Interest Rate.
Currently, the ERP is 4.56%. This is an ERP return equivalent to 2003 to 2007 and from 2017 to 2019. That amount of underlying earnings upside to U.S. stocks is OK. Not great.
AAA effective yield is 3.63%. Lower than 2003 to 2006. But equivalent to 2013 to 2019.
LIBOR 3M Rate is 1.47%. Equal to 2002 to 2004. Much lower than 2006 to 2007. Not as high as 2018 to 2019.
In short, the spread between the ERP and effective high grade corporate bond yields in the USA has narrowed considerably, vis-à-vis 2009 to 2019.
But this broad stock-bond return spread it is roughly similar to the cycle pattern seen in 2009 to 2009.
(3) The Bottom Panel:
This shows you U.S. Taxes on Corporate Income and the U.S. Inventory Valuation Adjustment.
Corporate Taxes are coming in at $469.8B. This amount of profit tax payment is similar to cycle highs seen in 2014-15 and 2006. Underlying U.S. corporate profit margins are very strong indeed.
Inventory Valuation Adjustment: This is at lows not seen in earlier data, going back two decades.
This is pressuring consumer prices to stay higher.
B. Zacks July Sector/Industry/Company Telescope
The latest Zacks Industry Rankings offer us two Attractive sectors. Again, an enduring top sector is Energy.
These industries maintain ongoing strength from $100+ oil a barrel, but U.S. Henry Hub natural gas prices have fallen dramatically.
A major Energy/Oil stock selloff has taken place.
Underlying Energy Sector fundamentals are sagging now.
Health Care also remained Attractive. The Medical Care industry remains solid. In Materials, Steel and Paper remain Attractive industries, but the overall Materials sector declined in status.
Utilities stayed on as a Market Weight. Water Supply is the best here. In Financials, Banks & Thrifts looked good, but the overall sector declined, as recession loss worries build up.
Info Tech remained at Unattractive sector in July. Electronics and Office Equipment keep market ratings. Semis fell. There is worry about the Semi sector traditionally overbuilding.
Both Consumer Staples and Consumer Discretionary rose a notch to Unattractive from Very Unattractive. They show us the negative influences of high consumer prices and rates.
(1) Energy stays the top sector, but fall to Attractive from Very Attractive in July. Tops is the Oil Misc. industry. Integrated and E&P stay on as great industries here too.
Top Zacks #1 Rank (STRONG BUY) stock: Marathon Petroleum (MPC - Free Report)
(2) Health Care remained Attractive. Medical Care stays on as the best industry group here.
Top Zacks #1 Rank (STRONG BUY) stock: Olympus
(3) Materials fall to Market Weight from Attractive. Steel and Paper remain best niches to own.
Top Zacks #1 Rank (STRONG BUY) stock: VALE (VALE - Free Report)
(4) Industrials remained at Market Weight. Metal Fabricating and Pollution Control remain as the best. Transport, Construction-Building Services, and Aerospace were at Market Weight.
(5) Communications Services rose to Market Weight from Very Unattractive. Telco Equipment is now Attractive. Telco Services continues to struggle, in the latest Zacks Industry Ranks.
(6) Utilities stay at a Market Weight. Utilities-Water Supply and Utility-Telephone are leaders.
(7) Financials remained at Unattractive. Banks & Thrifts stay the best. Insurance and Real Estate are a Market Weight. Other groups fall below that, mostly on recession loss worry.
(8) Info Tech remains Unattractive. Electronics-Semis and Computer-Office Equipment are the best at Market Weight. Misc. Tech and Computer-Software Services get downgraded.
(9) Consumer Discretionary rose to Unattractive from Very Unattractive. Leisure Services, along with Home-Furnishing and Autos/Tires/Trucks held up the best, at Market Weight. Fewer very poor groups, this month compared to last month.
(10) Consumer Staples rose to Unattractive from Very Unattractive. Bullish outlier is Agri-business (commodity prices). Poor stances for Tobacco, Soaps & Cosmetics, and Food/Drug Retail.
C. Conclusion
That’s it for me.
Enjoy the entire Zacks July Market Strategy Report.
Warm Regards,
John Blank, PhD.
Zacks Chief Equity Strategist and Economist