Charts for the beach − 2016
It’s once again time for our annual August report called “Charts for the beach”. Take a look at five of our favorite charts that highlight what we think consensus is currently missing. Remember the best method for inserting an umbrella in the sand is to rock it back and forth!
Not the end of the world
Our first table compares the current market environment with that of 1999/2000, and one will note the stark differences between the characteristics of a true “bubble” and today’s market. For example, the S&P 500®’s PE ratio in 1999 was 31 and the 10-year T-note was at 6.4%. Today, the PE is high by some standards (24), but the 10-year note is a mere 1.5%.
Source: Richard Bernstein Advisors LLC, Standard & Poor’s, Bloomberg Finance L.P. *TMT = Technology, Media, Telecom
Inflation expectations may have bottomed
The 5-year 5-year forward breakeven, supposedly the Fed’s favorite measure of inflation expectations, may have bottomed last February. Most equity and fixed-income portfolios seem incorrectly positioned if inflation expectations do indeed continue to increase. Anyone see the irony that “lower for longer” is now the widely accepted interest rate forecast at a time when inflation expectations might be troughing?
Source: Bloomberg Finance L.P.
Everyone hates equities
Our Wall Street Sentiment Indicator, which is a measure of the consensus recommended asset allocation by Wall Street firms, continues to show that Wall Street prefers other asset classes to equities. Importantly, this was true throughout the entire bull market of the 1980s and 1990s. The only times in the last 30 years Wall Street recommended overweighting equities was just prior to the “lost decade” in equities and in early 2007, just before the onset of the bear market. Today, Wall Street is back to the bullish sign of suggesting that investors underweight equities.
Source: Richard Bernstein Advisors LLC
Is anything positive about Brexit?
The precipitous fall in the British Pound could help the earnings of UK multinational companies. That positive idea though is being buried in the symphony of comments on Brexit’s negative effects.
Source: Bloomberg Finance L.P.
US stocks are fairly valued
RBA remains quite out of consensus in our view that the US equity market is not overvalued. One must keep in mind that it is not 7 years ago, and the market is not dirt cheap. However, our work suggests that the market is roughly fair value when the current S&P 500® earnings yield is compared to the current 1.5% 10-year note.
Source: Richard Bernstein Advisors LLC, Standard & Poor's, Bloomberg Finance L.P.
The following descriptions, while believed to be accurate, are in some cases abbreviated versions of more detailed or comprehensive definitions available from the sponsors or originators of the respective indices. Anyone interested in such further details is free to consult each such sponsor’s or originator’s website.
The past performance of an index is not a guarantee of future results.
Each index reflects an unmanaged universe of securities without any deduction for advisory fees or other expenses that would reduce actual returns, as well as the reinvestment of all income and dividends. An actual investment in the securities included in the index would require an investor to incur transaction costs, which would lower the performance results. Indices are not actively managed and investors cannot invest directly in the indices.
S&P 500®: Standard & Poor’s (S&P) 500® Index. The S&P 500® Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad US economy through changes in the aggregate market value of 500 stocks representing all major industries.
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About Richard Bernstein Advisors:
Richard Bernstein Advisors LLC is an independent investment adviser. RBA partners with several firms including Eaton Vance Corporation and First Trust Portfolios LP, and currently has $3.0 billion collectively under management and advisement as of June 30, 2016. RBA acts as sub‐advisor for the Eaton Vance Richard Bernstein Equity Strategy Fund, the Eaton Vance Richard Bernstein All‐Asset Strategy Fund and also offers income and unique theme‐oriented unit trusts through First Trust. RBA is also the index provider for the First Trust RBA American Industrial Renaissance® ETF and the First Trust RBA Quality Income ETF. Additionally, RBA runs ETF asset allocation SMA portfolios at UBS, Merrill Lynch, Morgan Stanley Smith Barney and on select RIA platforms. RBA's investment insights as well as further information about the firm and products can be found at www.RBAdvisors.com.