Market Update September 2020


The stock indexes we follow all had a good month in August. The Russell 2000 was up 5.5% while the NASDAQ was up 9.5%. The Dow and the S&P were both up over 7% for the month. All-in-all it was a good month. Is the stock market high right now, or is it fairly priced? There are so many different ways to measure stock market value that it would be sort of useless to try to figure it out.

One way that we use is to figure the Cyclically Adjusted Price to Earnings Ratio, called the CAPE. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that further increases in market prices only occur as a general response to earnings increases, instead of rising “just because”). The CAPE is now at just over 31. Does that mean that the stock market cannot go up anymore before it has a correction? No. The earnings of companies can continue to expand, sending the stock market higher without pushing up the CAPE further.

Because the FED flooded the capital markets with money (because of the COVID outbreak), there is still a lot of cash sitting on companies’ balance sheets. And that cash is really cheap right now. Interest rates from banks are still at historic lows, so where is all that money to go? For the most part it’s going in the stock market. That buoys stock prices.

The markets could fall at any time, we all know that. There are enough negative indicators that if one wanted to, he could make a convincing case to get out now. On the other hand, there are also a lot of positive indicators one could point to so that they could make the case to be fully invested at this point.

At ProVest, our active management has us partially out of the market at this time. Of the four indicators we use, three of them are positive and one is negative. We will continue to monitor the accounts you have entrusted to us and make adjustments to them when our research tells us to. Thank you for being a ProVest client and for trusting us with your hard-earned retirement assets.

On another subject, Ryan Detrick, chief market strategist at LPL Financial, published a study recently in which he said a simple equity-market chart has been the best predictor of U.S. presidential elections since 1984, proving 100% accurate—and is 87% accurate since 1928.The analyst says that a chart of the S&P 500’s performance in the three-month period ahead of Election Day, which is Nov. 3 this year, has proven accurate over the past nearly four decades. If the S&P 500 declines during this 3-month stretch, the incumbent party loses, but if the S&P 500 rises during this 3-month period, the incumbent party wins. On August 3rd, the S&P 500 finished at 3295. At the end of August, it stood at 3500.

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