Here's What I'm Monitoring as the Rest of the Market Focuses on NVIDIA
There are some upcoming reports that should give us a better sense of where the economy is headed.
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There was a decent take on MarketWatch earlier this week, looking at the current valuation of today’s market and comparing it using numerous valuation metrics to the equity market at the start of 2022.
For those who don’t recall, that was just before the last bear market that took the NASDAQ around a third that year. Of course, the fed funds rate was basically zero then and it was a few months before Fed Chairman Powell would launch the most aggressive monetary policy since the early '80s. Currently, the fed fund rate is 5.25% to 5.5% and it is a near certainty that the central bank will start to cut rates during the next FOMC meeting in mid-September.
I still think the comparison is illustrative and useful. On a price-to-sales and price-to-book ratio basis, the market is as pricey as the start of 2022 and at any time this century. The dividend yield on the S&P 500 is also at an all-time low. On a market-cap-to-GDP ratio (one of Warren Buffett’s favorite indicators), stocks have never been so dear.
Now, if AI was about to trigger an internet-boom type growth wave (GDP growth averaged more than 4% annually from 1996 to 1999), maybe I could see some justification for such stretched valuations. Unfortunately, the U.S. will be lucky to slog through 2024 with 2% growth for the year. And this with the federal government running a fiscal deficit north of 6%! We also know from the July BLS jobs report and the massive downward revision by the BLS last week of the previous year’s jobs growth that the jobs market is not nearly as strong as was thought just a few months ago.
Doug Kass posted some selective commentary from the latest Richmond Manufacturing Survey in his Daily Diary yesterday, pointing to a sector that has been in recessionary territory for quite some time now. It is hard to get much encouragement from reading the comments from some of the manufacturers surveyed.
The Home Furnishings area seems to be in a particularly bad place judging from comments. Although horrid Q2 numbers from American Woodmark Corporation AMWD on Tuesday also underscored the same headwinds in this industry. In recent months, I know that the amount of special discount emails I get from Pottery Barn and Renovation Hardware have more than doubled. The only sector I can think of off the top of my head that might be in worst shape is the RV space. It is hard to remember how gangbusters these companies were doing during the pandemic and immediate aftermath.
So, as we get ready to head into September, there are a few things I will be keeping an eye on. The first is the August BLS jobs report that comes out on September 6. Hopefully, it will not show continued deterioration in the jobs market, which should allow the Fed to bring down rates in a calm 25 BPS cut in a timely manner. The second is whether there are more signs that consumer spending is coming under additional pressure, especially on the high end that has recently seen some cracks. Finally, I will be watching to see if the yield spread between the two- and ten-year treasury yields finally normalized after more than two years of being inverted. We are about 5 BPS away from that event that has happened before recessions in the past.
And that is what I am monitoring as the rest of the market is laser focused on the latest quarterly earnings report from NVIDIA Corporation NVDA, which will be out after the bell on Wednesday.
At the time of publication, Jensen had no positions in any securities mentioned.
