June into August Monday August 7th 2017

Business as usual?

Age of the Wildebeests

The chart above from the nonpareil of trend spotters, Callum Thomas of Top Down Charts, suggests that the trend-setting S & P 500 is performing (returns including dividends) so far pretty much in line with the average over the last 26 years and even more so if the exceptional years 2007-9 are excluded. This is quite reassuring but it cannot be denied that the Index was higher in July for the ninth successive month, which it has not achieved since 1995 and 1983 before that. The Index has already hit 33 all-time-highs in 2017, overtaking last year’s score and closing in on that in 2014. Then there are all elevated valuations to consider with the Shiller PE at 30.29 on Friday finally overtaking its peak on Black Tuesday in 1929 but still a long way short of the Dot.Com surge in 2000. The seemingly relentless progress is inevitably provoking those forecasting a new financial crisis to redouble their warnings. Certainly, corrections are always around the corner and the table below from Charlie Bilello neatly tabulates all of them since the 2007-8 and, intriguingly, their probable catalysts.  Right now it is hard to identify even one probable catalyst for any immediate correction but a China debt crisis has been a risk for some time without ever seeming imminent. The most likely could well be a replay of May 2009: ‘worries that the Market has gotten ahead of itself’.

Coming up next: a correction in search of a catalyst?

As it happens, the S & P was not the pace-setter in July but its relatively steady progress combined with bonds’ settling lower again after a tricky Q2 seems to have provided sufficient comfort for many investors to embark on some esoteric yield-hunting. In favour were the US Tech stocks (yet again), Hong Kong and Mumbai stocks, Italian banks and Oil while Wheat fell from grace after a spectacular Q2. The FX market was on its toes with the dollar down against almost everything except the Swiss franc (at last!)and the euro up across the board. The pound was down except vs. the dollar as was the yen while the Brazilian real had yet another big move (up this time). It would be good to be able to justify these movements (mini-stampedes) and the partial reversals of some them in early August.

Alastair Winter