OVERVIEW
Markets surged last week, marking one of the strongest weekly performances in recent months as gains spread broadly across equities and commodities. The S&P 500 rose 1.92%, while the Dow Jones Industrial Average gained 2.20%. The NASDAQ led large caps higher with a 2.31% advance, and the Russell 3000 added 1.95%. Growth stocks outpaced value for the week, rising 2.11% versus 1.75%, as optimism returned across sectors.
Small and mid-sized companies were standouts. The S&P 600 (small cap) surged 3.02%, while the S&P 400 (mid cap) climbed 2.32%, and large caps (S&P 100) gained 1.95%. International markets joined the rally—developed markets (EAFE) rose 1.24%, and emerging markets advanced 2.04%.
Bond markets were steady to modestly higher. Long-term Treasuries rose 0.29%, while intermediate- and short-term Treasuries each gained 0.08%. Investment-grade bonds advanced 0.31%, and high-yield bonds added 0.40%. Inflation-protected securities (TIPS) gained 0.26%, while municipal bonds ticked up 0.17%.
Commodities rallied as well. Oil surged 7.65%, leading the group, while gold slipped 1.79% after a strong run. Broad commodities rose 1.67%, and real estate rebounded 1.38%. Master limited partnerships (MLPs) climbed 2.74%, while emerging market bonds posted mixed results—U.S. dollar issues gained 0.57%, and local currency bonds slipped 0.05%.
The U.S. dollar firmed 0.58%, but volatility dropped sharply, with the VIX tumbling 21.22%, reflecting a return of investor confidence after several choppy weeks.
KEY CONSIDERATIONS
Why So Serious? – I must admit, the stock market has been pretty relentless in recent months. Only once in the past 5 months has the S&P 500 come close to touching its average 50-day price (50-day moving average)—a key short-term technical level—and even that was short-lived.
I like to refer to the 50-day average (the blue dashed line above) as the “OK, You’ve Got My Attention” level. It usually doesn’t amount to anything, but sometimes it does mark the beginning of something bigger.
What is that something bigger? That usually occurs when the index falls all the way to its 200-day average price (the 200-day moving average). This level—shown as the orange dashed line below—is what I like to call the “Let’s Get Serious” level. It’s kind of like the internet meme where the man leans forward in his char while playing a video game—yeah, it’s time to get serious.
But again, we’re nowhere close to that level right now. From current levels, the S&P 500 would have to drop more than 10% (a technical correction) to get to its “Let’s Get Serious” level.
In other words, all this is to say that the market’s price action—it’s price movements—are very bullish right now. The trend is up—and momentum remains strong.
So where are the concerns? Well, valuations, of course, are a concern. We’ve talked before about valuations and why they’re a poor timing tool, so in the short term, it’s not super concerning. But over the longer term, they do start to become a problem.
Right now, as the chart below shows, the S&P 500’s median (middle average) stock has a trailing price-to-earnings ratio of 26.2, which is in the top 5% of readings going back to 1964.
Again, that’s the middle average of the stocks in the S&P 500, so the big tech stocks aren’t necessarily dragging the overall P/E ratio higher. Put another way, if we separate out the so-called Mag 7 stocks, shown below, we see that sure, the Mag 7 stocks—driven by AI euphoria—are expensive, but the other 493 stocks in the index? They’re expensive, too. In fact, using forward P/Es, the Mag 7 P/E of 31 is in the top 20% since 2010, versus 2% for the S&P 493.
So what is this all telling us? Well, basically, the market’s price action is trying to justify sky-high valuations. Maybe the day of reckoning will come, likely during the next recession when earnings normally fall sharply.
But according to the market, that day is not today. The key technical levels mentioned above will be… well, key to knowing when it’s time to “get serious” about these market valuations.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.
The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The Nasdaq 100 Index is a basket of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. The Russell 3000 Index is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S. stock market. The S&P MidCap 400 is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. S&P 600 Index measures the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable. The S&P 100 index is a capitalization-weighted index based on 100 highly capitalized stocks for which options are listed on the CBOE (Chicago Board of Exchange). The MSCI EAFE Index is an equity index which captures large and mid cap representation across 21 Developed Markets countries* around the world, excluding the US and Canada.
The Bloomberg U.S. Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. The Bloomberg U.S. Corporate High Yield Index is comprised of domestic and corporate bonds rated Ba and below with a minimum outstanding amount of $150 million. The Bloomberg U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.