Weekly Summary:Question Not Answered

Question Not Yet Answered

This week, the market ‘yo-yoed’ its way to a slight (1%) recovery from last Friday’s close. The question we asked last week, ”Is This The Inflection Point?” , is still not answered. What remains clear, however, is that the market’s valuations continue to be stretched.

The Schiller PE ratio for the S&P 500 (26.56) has only been higher on three previous occasions in the last 140 years: during the tech bubble, during the housing bubble of 2007, and just before the 1929 crash (chart below).

Schiller PE Ratio of S&P 500:

Investors are paying $1.90 for a dollar of earnings; more than at any time in the last fifteen years (chart below).

S&P 500 Price to Earnings Ratio:

Earnings growth for the SPX has been negative for the last five quarters.
S&P 500 Earnings Growth Rate:

GAAP earnings for the S&P 500 are sitting at the same level as in 2007, but the S&P 500 is 38% higher now.

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Gold
Gold continues to slowly grind lower and we expect this to continue well into next year. Even though it is unlikely that the FED will raise rates this coming week or before the election (CME FED tool), the chatter from the FED will continue to keep an upward bias on rate expectations. This will support the dollar and the USD/JPY pair, and maintain pressure on gold.

Both the 2-year Treasury and the 30-year treasury rates are directing the movements in gold (see charts below).

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Source: Nicholas Gomez