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Economic Outlook for 10/01/2017

By: Nelson Nga Nguyen, CFA, CPA

Economic Outlook 10/01/2017

Fundamental Indicators

Adept Analyst

Median
Mean
S&P 500 P/E (TTM)
23.20
40.20
S&P 500 P/E (Forward)
19.80
25.28
S&P 500 Estimated 5-Year Long-Term Earnings Growth Rate
10.09
12.11
S&P SmallCap 600 P/E (TTM)
26.10
47.63
S&P SmallCap 600 P/E (Forward)
21.50
29.29
S&P SmallCap 600 Estimated 5-Year Long-Term Earnings Growth Rate
12.00
13.12
Investment Grade Corporate Bonds

3.37%
High Yield Corporate Bonds

7.67%
Corporate Credit Spread

4.30%
·       S&P 500 Sales Year-over-Year: 21,571.21 / 20,515.37 = 1.05
·       S&P 500 Leading Indicator) Current Average S&P 500 Estimated EPS / Previous Average S&P 500 Estimated EPS: 25.88 / 26.02 = 0.99
·       S&P 500 Lagging Indicator) Current Average S&P 500 Inventory-to-Sales Ratio: 1,624.11 / 21,571.21 = 7.53%
o   Compared to Previous Average S&P 500 Inventory-to-Sales Ratio: 1,657.34 / 21,731.48 = 7.63%
·       S&P SmallCap 600 Sales Year-over-Year: 1,273.83 / 1,241.81= 1.03
·       S&P SmallCap 600 Leading Indicator) Current Average S&P SmallCap 600 Estimated EPS / Previous Average S&P SmallCap 600 Estimated EPS: 1.63 / 1.66 = 0.98
·       S&P SmallCap 600 Lagging Indicator) Current Average S&P SmallCap 600 Inventory-to-Sales Ratio: 139.73 / 1,273.83 = 10.97%
o   Compared to Previous Average S&P SmallCap 600 Inventory-to-Sales Ratio: 140.07 / 1,288.85 = 10.87%

Warren Buffet’s Market Cap-to-GDP

Ratio = Total Market Cap / GDP
Valuation
Ratio < 50%
Significantly Undervalued
50% < Ratio < 75%
Modestly Undervalued
75% < Ratio < 90%
Fair Valued
90% < Ratio < 115%
Modestly Overvalued
Ratio > 115%
Significantly Overvalued
Where are we today (8/31/2017)?
Ratio = 136.2%, Significantly Overvalued

Schiller PE

Shiller P/E: 31.0
Shiller P/E is 84.5% higher than the historical mean of 16.8
Implied future annual return: -2.3%
Historical low: 4.8
Historical high: 44.2
S&P 500: 2519.36
Regular P/E: 25 (historical mean: 16)
Scenario
Shiller P/E after 8 Years
Annual Return from Today (%)
Really Lucky
Mean x 150%
4.6%
Lucky
Mean x 125%
2.3%
Reverse to the Mean
Mean x 100%
-0.3%
Unlucky
Mean x 75%
-3.7%
Really Unlucky
Mean x 50%
-8.2%

Morningstar’s Market Fair Value

All Rated Stocks
09/30/2017 = 1.03
03/01/2017 52-Week High = 1.06
11/04/2016 52-Week Low = 0.96
12/31/2004 All-Time High = 1.14
11/20/2008 All-Time Low = 0.54

Market Fair Value
Valuation
Ratio < 1.00
Undervalued
1.00
Fair Valued
Ratio > 1.00
Overvalued

 

Value Line’s Median Appreciation Potential

VLMAP = 30% Hypothesized appreciation potential of all 1700 stocks 3-5 years hence.
26 Weeks Ago = 35%
Market Low 3-9-09 = 185%
Market High 8-7-17 = 35%

Please see Summary & Index (subscription required): http://valueline.com/

Administrative

Fed Discount Rate (Stance)
16-Mar-17
1.50%
15-Jun-17
1.75%
Restrictive
Increase

Fed Funds Rate (Stringency)
2017-07
1.15%
2017-08
1.16%
2017-09
1.16%
Restrictive
Increase



Broad Fed Policy (Stance)


Expansive
Restrictive
Rigor of Fed Actions (Stringency)
Expansive
Expansive
Indeterminate
Restrictive
Indeterminate
Restrictive

Invest with the Fed model indicates the Federal Reserve is Restrictive.



Interest Rates

Current
2017-08
1-Year U.S. Treasury
1.27%
1.23%
5-Year U.S. Treasury
1.88%
1.72%
10-Year U.S. Treasury
2.26%
2.15%
20-Year U.S. Treasury
2.57%
2.49%
30-Year U.S. Treasury
2.80%
2.75%

Inflation

2017-08
2017-07
Inflation
1.9%
1.7%

Unemployment Claims
Previous
260K
Current
272K
Bearish
Increase



Technical Indicators

S&P 500 20-Day Exponential Moving Average and 50-Day Exponential Moving Average




iShares Russell 2000 20-Day Exponential Moving Average and 50-Day Exponential Moving Average




$VIX Volatility Index 50-Day Exponential Moving Average and 200-Day Exponential Moving Average

It should be noted that the VIX is inversely correlated with the broader market.  Therefore, when the S&P 500 is bullish the VIX is bearish and VIX is bullish when the S&P 500 is bearish.



Short Tells
SPY Short Ratio: 2.69
IWM Short Ratio: 4.41
Short Ratio < 0.40
Bullish
0.40 < Short Ratio
Bearish

SPY Put-Call Ratio: 2.207
IWM Put-Call Ratio: 2.383
VIX Put-Call Ratio: 0.649
Put-Call Ratio < 0.60
Bullish
0.60 < Put-Call Ratio < 1.00
Neutral
1.00 < Put-Call Ratio
Bearish

It should be noted that the VIX is inversely correlated with the broader market.  Therefore, when the S&P 500 is bullish the VIX is bearish and VIX is bullish when the S&P 500 is bearish.

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