Happy Fri-YAY, y’all! It’s Labor Day weekend so while we are in the back-to school mindset we may as well do a little studying of the latest in the wild world of finance. It’s been a couple of weeks, so the syllabus is full. You’ve had all these classes before so nothing to worry about and there definitely won’t be a quiz at the end.
It’s been a positive year in the stock market and August was more of the same (not a complaint). That inevitably leads some to wonder if the market is “expensive, too high, frothy, overcooked” or any other creative descriptor you want to use. To answer that question, we need a basis for comparison. The natural thought is to look at the price of the index and compare it to a previous marker. For example, it’s ~4500 today and it was ~4000 back then so it’s a lot higher. That must mean it’s expensive, right? Wrong. As we know, that overall index number is simply a reflection of what investors are paying for the money companies are making (earnings). In the 4000-to-4500 example, we are assuming that the earnings are the same on both days or just forgetting that part of the formula – that’s why we have to show our work.
The earnings portion is vital for drawing any conclusions and earnings have been on fire this year. When we combine the company earnings with the overall price of the market, we get to a helpful little tool called the price-to-earnings ratio. This gives us a much more useful basis for comparing where we are today versus where we were back then. Below we have this ratio for the S&P 500 over the last year. A high p-to-e means the market is expensive and a low one is cheap. As you see, the ratio peaked at the end of March and took a big step down. That level down wasn’t because the index number fell but rather, the earnings were very high when reported in April. This same leveling down occurred in July after strong earnings reports. All told, the price of the market is just under where it was a year ago which is good to see. Analyzing the ratio in historical context is a class for next semester.
Another quick metric to look at is how many stocks are currently at their high for the year. We have a chart of this below. It’s somewhat intuitive but when we see a majority of stocks at 52-week highs it indicates things are expensive. The idea being that we want discerning investors pushing up the companies that are performing and not just buying any and all. When we see the “everything rally” that can be an indication of froth which isn’t showing up on this look.
High Note Wealth Quick Hits
The Jobs Report: Summertime Sadness Remix
Friday, we received the jobs report for August and it was a whiff. Estimates were calling for 720k new jobs and the number came at …235k. Whoops. Not sure what everyone was doing in August, but it certainly wasn’t creating jobs. It would be fun to say that corporate America spent too much time at the beach and not enough time at work but likely the complications from the Delta COVID variant had more to do with it. Regardless, this will certainly raise an eyebrow or two at the Fed.
If we take a step back, employment is still considered strong given the mess of the past year and a half. Unemployment ticked down to 5.2% from 5.4%. As you can see in the chart below, unemployment is WAY BETTER today than it was just 6 months ago. While it is continuing in the proper direction, there is still a lot of work to be done to get back to the sub-4% number posted pre-pandemic.
After publication, the stock market moved from green to red but that was shortlived. Quick reminder of the relevance for us: jobs = disposable income + tax collection + unemployment benefits not paid = corporate revenue increases + government savings = real GDP growth + stock market performance. Or something like that.
September Sucks?
Wish there was a nicer way to put it but there really isn’t. Check out the table below that looks at the average monthly returns of the Dow Jones over the years. Whether you look at the 100-year time frame or 50 or 20-year, it’s the worst. This look at seasonality is always interesting, but not stable enough to be actionable. But why? Good question, theoretical reader. Couldn’t an investor, using strict discipline and living long enough to invest for 100 years, sell all stocks on August 31st and buy them lower on October 1 st? Wow, even better question. It does sound like a viable strategy but there are a couple of problems with that approach.
First, in terms of sample size, 100 years is a lot of time but not a very big sample when analyzing data (e.g., we certainly won’t trust driverless cars that have only been tested 100 times). Given the smaller size, a single year can cause “noise”. For example, if you take out the returns of September 2008 when Lehman Brothers went kaboom the numbers look much different (that year the September stock return was -20%). Now before you ask, yes, you can make some adjustments to eliminate said outliers like using a median but then we are subjectively looking for “normal” years and/or handpicking the data which is a no-no. That sort of data mining gets us to statements like, “there is a 0% chance of precipitation on days it doesn’t rain.”
Second, as you can see in the table, the last 20 years have a negative average but were positive 50% of the time. So, a coin flip more or less. That’s not helpful. Interesting but not actionable….
Club Vaxx: 8, 6, [7], 5, [3-0-9]
Boosters are here and we aren’t talking about the seats or the billionaires that love to donate to their alma matter’s football team. We are talking booster shots. It’s almost like there’s been a concerted effort to ease the public into the idea. First, we hear we need a booster in 8 months. A couple of weeks later it’s moved to 6 months. And now 5 months is being thrown around. Perhaps they are easing the blow that we will all need to get inoculated monthly for the rest of our lives. You can read about the 5-month idea here.
Frequency aside, with the rise of variants like Delta and beyond, the shots make sense. This week the WHO released some information about a strain showing up in South America called “Mu”. The concern is that the strain is “vaccine evasive.” Fun. Here is an article discussing the variant and here’s to hoping it burns itself out.
