The S&P 500 index trades at 2990 as I write. The risk-reward calculus on the broad index no longer flashes a buy signal to me. The economic data around the world has deteriorated at an accelerating pace, as the decline in global PMI’s, 9% fall in German factory orders and $13 trillion in government debt trading at negative interest rates attest. Commodities prices are under pressure. The IMF has slashed global growth estimates. The liquidity situation in China (and Hong Kong) is downright scary.
“An ounce of prevention is better than a pound of cure”. These words were spoken by Fed Chairman Jay Powell and they allude to his intention to cut the Fed Funds rate by 25 basis points as preemptive insurance at the July FOMC. Yet the Powell Fed’s rate cut reflect the risks of a synchronized global slowdown, and rising recession risk. The US stock market has priced in the Fed’s monetary ballast, Powell’s epic U-turn on interest rates since the January FOMC. The S&P 500 index now trades at 17 times forward earnings at a time when Eurozone is in a political and economic mess (the ECB’s next President is a French politician, not a German central banker) and US-China trade tensions are nowhere near resolution. My conviction that the S&P 500 index is a short here does not negate my belief that there is no shortage of undervalued companies and even sector ETF’s I can buy – but my love for a company’s stock is only at a specific price/value zone. I believe the NASDAQ composite is also overvalued at 8140 and faces a 20% correction in the next twelve months, down to 6400 – 6500. Why?