Q4 2017 Review: Will The Bull Market Continue?

With the @Dow Jones Industrial Average approaching 25,000, the S&P 500 touching 2,700, and the tech-heavy @Nasdaq Composite topping 7,000, our quantitative strategy has once again harvested considerable quarterly gains. The US stock market is likely to have its second-best year since the financial crisis. While the Dow has touched a new all-time high one out of every four days this year, the Nasdaq is up almost 30% year to date. One $64-million-dollar question that every investor wonders about is, will the bull market continue next year? Since the presidential election last year, over half of the S&P 500's sectors contributed to this one-year rally, with the Information Technology sector leading the way, miles ahead of others. Broadly speaking, 2017 can be seen as a marketwide rally. Among all the large-cap sectors, there is one particular phenomenon that is boosting investor confidence: sector rotation. Dissecting 2017 into short segments, we observe that different sectors tend to lead the market at different times. Especially, two of the heavyweights, Financials and Technology, have alternated frequently this year, with joint force from Health Care and Consumer Discretionary. This pattern is typically deemed a healthy sign of broad market participation, particularly in a bull market like 2017's. It also marks a crucial difference between the current bull market run and the 1999 tech-bubble: Two decades ago, the market was led mainly by one sector. Another major characteristic of this bull run is that volatility has remained significantly low. Twelve months ago, the VIX's sustaining below a 10 handle was not on anyone's forecast list for 2017. One of the main reasons explaining a low-VIX environment is that 2017 hasn't seen any major pullback: 3% is as much as the stock market has retreated in the past twelve months. However, while many may view VIX as a bargain at this time, we would like to remind investors that VIX is cheap only if it poised to rebound soon, as trading VIX exposes investors to significant risk. So will the bull market continue into 2018? We will have to wait to find out in our 4Q2018 quarterly review. However, just as our quant model constantly monitors the market, we should always watch closely the important factors underlying a bull market.

https://seekingalpha.com/article/4133620-q4-2017-review-will-bull-market-continue

Is The Stock Market Dirt Cheap Or A Bubble?

@WarrenBuffett asserted earlier this year that stocks are " #dirtcheap " if interest rates stay low. Earnings yields on stocks are still way above bond yields. There is reason to believe that #lowinterest rates could stay in place for years or even decades, as evidenced by Japan's experience. Demographic and structural factors may hold back inflation and growth that would justify a rate hike. Stocks probably are not in a #bubble, although investors should stay away from certain pockets of irrational exuberance. Although not all professional investors and analysts think that stock market valuations are in bubble territory, most would probably agree that U.S. businesses are at least fully valued. By almost any measure, the P/E ratio for the S&P 500 is at a historically high level. Looking at a chart that tracks the market's P/E over time, it would appear as though the current bull market is on par with the late-1990s tech bubble and the mid-2000s housing bubble.  Interest Rates One notable optimist, though, is none other than Warren Buffett. Indeed, the Oracle of Omaha stated earlier this year that stocks could be "dirt cheap" if interest rates stay low. For many investors, it all comes back to opportunity cost. Back when I was born, the 10-year Treasury yielded about 6.5 percent, but today the same U.S. government bonds yield just 2.3 percent. When inflation is factored in, real interest rates are still very close to zero. Although the P/E for the S&P 500 now sits above 25, the resulting earnings yield of about 4 percent makes owning stocks decisively more attractive than holding bonds. Even with the current Shiller P/E of 31, which adjusts for cyclicality, stocks still yield nearly 50 percent more than U.S. Treasuries. Because U.S. government bonds are a virtually risk-free investment, it makes no sense at all to hold an asset with a lesser expected return. At the height of the tech bubble in 2000, though, the yield on Treasury securities eclipsed the S&P 500's earnings yield by a wide margin. With bonds yielding more than 6 percent and stocks at just over 3 percent, a rational person would have easily seen that the market was descending into madness. There has been a lot of talk about mean reversion as it relates to interest rates and stock valuation. If the Fed were to raise rates significantly, then of course the market would be overpriced. That may yet happen, but there is reason to believe that historically low interest rates could stick around for a long time.

https://seekingalpha.com/article/4114062-stock-market-dirt-cheap-bubble