Is The Market Actually Trading At A Discount?!
1.) MOVE – The Move Index is approaching a very important area as bond yields retreat into tomorrow’s CPI print. Why important? Because if the MOVE finds support at 96 (it’s at 98.50 this morning), it could easily reverse higher on a hotter than expected CPI print. The drop in bond volatility recently could be interpreted as “complacency” by bond investors. Complacency in an asset class isn’t something bulls should be asking for. In addition to the MOVE index nearing important support, longer dated yields are as well. So, we have a complacent investor class along with volatility and yields nearing some important support. It’s those kinds of things that Mr. Market specializes in…creating as much pain as possible for as many people as possible. Notwithstanding that we could be close to a longer term top in yields (discussed yesterday), which would be good for bonds, we still have to deal with short term volatility and data points that can cause a lot of short term fear and grief. If we see the MOVE Index break below that shaded area (bottom level is 87), we could see a bond rally ensue. That might not happen overnight, of course, but as I wrote yesterday, there are a lot of signals suggesting the bond set up is improving.
2.) DOLLAR – Positioning by the “big boys and girls” in any asset class tends to dictate the flows of that asset. Recently, Institutional investors have piled back into the USD in recent weeks. Does that really matter? Well, the S&P 500 has a 0.64 positive 15 day correlation with the Dollar and a 0.60 positive correlation on a 30 day basis. So…yes…that institutional positing does matter. Does that guarantee the Dollar AND the S&P go higher right away? NO, but it isn’t a negative either.
3.) PROFITS/MARGINS – As has been said in the past, earnings are the mother’s milk of the stock market…they’re needed for growth! Corporate margins continue to shoot the moon as a combination of cyclical and secular forces continue to play out. The higher realized numbers go, the more the forward-looking estimates extrapolate. And this isn't just a large-cap phenomenon. On top of that, as you can see in the second chart below, if we map these recent developments onto a Valuation vs. Profitability framework, you can see that the market is now trading close to three standard deviations below its long-term trend. What does that mean? That this market looks more undervalued than overvalued! Right now, maybe due to AI, the market is trading at a discount relative to its current high profitability. Higher margins have historically supported higher multiples.
