Here we are, summer in full swing. On the economic front, we had a pretty light calendar in the month of June. We did see some positive things happen.
If you just looked at the headlines you would think, “Wow the markets are just off to the races, it’s record, after record, after record.” In fact, in one of our recent radio programs we talked about the record highs of the stock market. However, the breadth of the increases of the markets during the month of June were not what they have been in the past. We also have some solid data on the housing front.
We’ve got some things that are going on behind the scenes in Washington that are keeping the markets propped up a little bit. The Trump administration hopes to repeal Obamacare, you’ve got the hopes of an economic policy coming out of the Trump administration, and the hopes of a tax plan coming out of the Trump administration. Until we get some clarity as to what’s really going to go on there, I don’t think we’re going to see any drastic movements in one direction or the other in either the stock market or bond market.
So as we go through some of the charts below what we’re going to identify is that what we saw in the month of June was pretty much a non-event across the board.
As I go through these numbers I want you to keep in mind that as of writing this it is June the 29th. I am going to take a long vacation with the family, so I will be out of town as of the end of the month and the first business day of July. Here are the numbers as of June 29th.
You can see here for June through the 28th, the Russell 2000 was the big winner followed by S&P 600 SmallCap, up 2.18% and 1.40% respectively. The NASDAQ 100 comes in at the bottom, down 1.28%. And we can see the S&P 500 eeking out a small gain of just 0.05%.
Now if we look at the same chart in a Year-to-Date view we see things look totally different. NASDAQ year-to-date up 18.18%, and then at the bottom is the S&P 600 SmallCap up just 2.61% with the Russell 2000 above that, up 5.29%, and the S&P 500 above those, up 8.93%.
So when I was saying earlier that the breadth of the increase in the markets was not nearly what it has been, that is what I was talking about.
Now if we take a look at the different sectors within the market we see a very similar story. For the month of June, Financials were the big winner, up 4.16%, followed by Health Care, up 4.11%. Down at the bottom of the pile starting with Technology, down 1.59%, Consumer Discretionary, Energy, Consumer Staples, all down 2% or more, and Utilities down 3.25%.
Again, if we turn this chart around to look at what’s happened so far this year it’s a totally different chart. Year-to-Date Health Care is the number one sector up 16.16%, followed by Technology and Consumer Discretionary. At the bottom of the pack, should be no surprise to anyone, is Energy down 14.38%.
Now, I spoke several months ago about the valuations of the market, so let’s take a look at market valuations again. What you’re looking at above is an average valuations using four different measures of valuations of stock prices. You’ve got Crestmont P/E from its Geometric Mean, Cyclical P/E 10 from its Geometric Mean, Q Ratio from its Geometric Mean, and S&P Composite from its Regression. The average of those four is 96% above fair value valuation. So how does that compare historically.
Let’s look back, following the blue line, you can see that at the height of the market just before it crashed in the Great Depression, equity valuations were 87% above fair value being measured exactly the same way. By the time we hit the tech bubble in 1999, equity valuations were 156% above fair value. Just before the Great Recession equity valuations were just 72% above fair value. Here we are today with equity valuations being 96% above fair value.
To be sure we want to pay really close attention to these equity valuations, but I want you to keep in mind that just because equity valuations are high does not mean that they come down. We don’t see market crashes occur just because we see high equity valuations. There has to be a catalyst that causes that market to correct or to come back to more normalized levels.
In my opinion, what could cause that would be the failure of a passage of a tax plan, a passage of an economic plan, and some big time failures in the Trump administration. We’re going to keep a close eye on what is going on in the political environment because from an economic perspective things look pretty good today.
Let’s take a quick look at treasuries. This is just a chart showing what the 10 Year Treasury has done this month. On May 30th, the 10 Year Treasury Yield was at 2.21% and if you look at where we are today, we’re at 2.21%. So regardless of all of the speak about rising interest rates, we’re not seeing that in the 10 Year Treasury.
In fact, if we look day-by-day you can see that we actually got down to a low point of 2.14% on June 6th, we were 2.15% on June the 14th, and 2.14% as recently as June 26th. So, we’re not seeing a lot of upward pressure on that 10 Year Treasury Yield. If we were to move that yield down to the one month or the one year, you are seeing some increases on those yields but it’s not reflecting in the 10 Year Treasury. What that’s telling us is that the 10 Year Treasury does not see significant inflation in the future.
Thank you again for joining me for this Monthly Economic Update. I look forward to talking to you again at the end of July. Hopefully, we will see you in our offices. If I raised any questions, concerns, or anything you want to talk to an advisor about please give us a call here at the office at 913-393-1000 or schedule a complimentary consultation below.
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