The chart above shows that the real earnings yield of the S&P 500 is the worst it has ever been. This chart was produced prior to today’s even higher CPI data. So the current level is even lower than the reading above.
“When you find that the crowd is overenthusiastically trying to buy, help them and sell. It usually works out.” John Templeton
The link above shows that for the last year leveraged assets have exploded to new highs, while at the same time insider sales have also reached new records. Insider sales usually have the better long term record.
“Insider sales in SP500 companies are up 50% YTD to $63.5BN.”
Last week’s note showed that in the US equity market most stocks show deteriorating performance from February 2021. The indexes, however, reflect the inclusion of the supercharged returns in zombie stocks, meme stocks and ultra big cap technology stocks. Extraordinary leverage and liquidity has not been spread evenly throughout the US equity market indexes, which represent an average of remarkable differences.
The chart below shows that over 60% of Nasdaq composite stocks are already down more than 20% off their recent highs. How do you call that a bull market?
The seperation of performance between different types of stock has been astonishing. On declining earnings over the year, “Apple has added $618 billion to its market cap this year, which is greater than the market cap of 492 companies in the S&P 500.” It’s price to sales ratio has tripled since 2019.
This is why benchmark indexes like the S&P 500 tell you very little about what happened to most stocks in 2021.
The bond market also sent a major signal in February 2021.
The chart below shows one of the most predictive market signals of all time, the yield curve. In February, the yield curve reversed from steepening to flattening at about the same time as most US equities peaked, including the Russell 2000 growth ETF IWO.
In aggregate both stocks and bonds are telling us that key forward indicators for growth and inflation have already passed. The yield curve signal says that stimulus will pass and some policy tightening will be implemented. Furthermore, only marginal interest rate rises may be needed to slow down the economy, as the 10 year yield high, around 2% this year, now looks like a peak. Yet another lower high in a trend that started in the early 1980s.
In most of 2021 the economy has experienced strong reflationary (quad 2) economic conditions from the stimulus. However, recently the markets have indicated that quad 2 ended a week or so ago, as inflation is likely reaching a peak. Growth remains strong but in rate of change terms it is also close to a peak. The market is now signalling goldilocks (quad 1), or deflationary (quad 4) conditions going in to 2022.
The Fed has so excessively over managed policy that the bond market has signalled that interest rate flexibility has now become very limited to somewhere between zero and 2%. This is another way of saying that some plausible outcomes could now be beyond the Fed’s ability to manage conditions effectively, whether too much inflation or too little growth. This predicament is described in my second Money Show video on the front page of my web site.
The Fed also has a timing problem. The Fed now states that it wants to tighten policy, but the markets are already indicating that it may already be behind the curve. If the Fed has overstimulated and is now late, the risk is that tightening could end up being procyclical, and could accentuate the down cycle if its not very careful.
The signs are all over the stock and bond markets that the Federal Reserve’s extreme policy actions have created distortions that are going to cause a challenging hangover for the markets and the economy.
Tightening policy could easily backfire as they start to unwind their stimulus. Next week’s Fed meeting and every meeting from here on, the Fed will be walking a tightrope.