Will September be as bad as usual for stocks? … what the Buffett Indicator is saying about valuations … the longest yield-curve inversion since 2009 … savings rates are dropping
We avoided mentioning this last week, not wanting to rain on your Labor Day…But welcome to the worst month of the year for the stock market. Historically, stocks fall 1.03% in September. That doesn’t sound like much, but remember, that’s just an average. Plus, in years where the market is down heading in September, those average returns drop even more. Here’s the research shop, Bespoke, with those details:
When the S&P has been down YTD (year to date) through the end of August (as it is this year), the index has averaged a decline of 3.4% in September, whereas September has been flat when the index was up YTD heading into the month.For the remainder of the year, the index has averaged a loss of 1.2% when coming into September with YTD losses and a gain of 3.3% when coming into September up YTD.
So, will September match its historical reputation for losses?Well, what we know is that this market is laser-focused on data. That’s because the Fed is laser-focused on data, and its decisions are driving the market. At the moment, we have a brief window of little new data to chew on (not counting today’s ISM data that we’ll discuss later). We’re in the calm between earnings seasons. Plus, the next CPI release doesn’t come out until a week from today. And, of course, the Fed doesn’t meet until the 20th and 21st. So, let’s use this as an opportunity to step back to get some different perspectives on today’s market. We’ll begin with Warren Buffett’s favorite valuation indicator (in honor of his 92nd birthday last week).
How does the “Buffett Indicator” value today’s market?
Multi-billionaire Warren Buffett is arguably the greatest investor of the modern era. So, let’s check in on an indicator he once told Forbes is “probably the best single measure of where valuations stand at any given moment.”The “Buffett Indicator,” as it’s since become known, is the total value of public equities divided by a country’s gross domestic product. Think of it as a “price-to-sales” ratio for an entire country. What’s it telling us today? As of last week, with the aggregate U.S. market value at $43.4 trillion and the Annualized GDP at $24.9 trillion, the indicator clocked in at 173%. Here’s CurrentMarketValuation to contextualize this for us:
By our calculation that is currently 36% (or about 1.0 standard deviations) above the historical average, suggesting that the market is Overvalued. We are coming off historical highs for this indicator.
For a bit more context, the average since 1995 is 109%.So, despite the losses on the year, stocks remain overvalued by this metric. As you can see below, in late 2021, this indicator topped a 2X standard deviation level (an all-time-high), which was on par with levels seen only during the Internet Bubble (dating back to 1950).
Now, this alone isn’t a reason to bail on the stock market. After all, the Buffett Indicator has been in overvalued territory for years. Had you used it as a driver of being “in” or “out” of the market, you would have missed out on great returns last decade.So, it’s better used as an incredibly blunt tool that gives us an overall sense of valuation rather than a precise tool that would help us with market timing. But that doesn’t mean it’s not helpful. Studies show a general correlation between the levels of the Buffett Indicator and subsequent S&P 500 returns. Intuitively, the higher the Buffett Indicator reading, the lower the S&P returns over the next five years. Bottom line – though not a timing tool, the Buffett Indicator is in bearish territory today.
Meanwhile, what happened to the media hype about the yield curve inversion?
Remember all the headlines back in the spring when the yield curve briefly inverted?To make sure we’re all on the same page, this happened in April when the yield on the 10-year treasury bond briefly fell below that of the two-year treasury note. So, what’s the big deal about that? In short, in a healthy market, this doesn’t happen. It’s intuitive that the longer you tie-up your money in a bond, the higher the return you’d expect. So, when short-term yields are higher than long-term yields, it reflects uncertainty in the market and fear of the future. Importantly, this isn’t a vague indicator that doesn’t amount to anything tangible. Every U.S. recession in the past 60 years was preceded by an inverted 10/2 yield curve. Given that overall context, what’s the relationship between the 10- and two-year treasury yields today? It’s inverted…and has been since the beginning of July. You can see this below in a six-month chart of the “10-2 Treasury Yield Spread.” A negative reading reflects the inversion.
So, where are the headlines trumpeting this news today?Well, they’re not really out there anymore. Part of the reason why is because this is old news. As mentioned a moment ago, the 10/2 has been inverted since early July.
But this is what’s now the most troubling part of this story – the duration of this inversion
The last time we saw a 10/2-inversion of this length or longer was back in 2007/2008. That was the eight-month inversion that preceded the financial crisis.And the time before that? You guessed it. It was the inversion shortly before the dot-com bubble peak in 2000. That one lasted about a year. If you’re tempted to brush this off, I’ll note that the 10-year treasury yield and the 3-month treasury yield have been flirting with their own inversion. The New York Fed uses this indicator in a model to predict recessions between 2 to 6 quarters ahead. Below is a five-year chart of the 10-year/three-month spread. You can see it plummeting since the spring. Last month it nearly went negative on several occasions.
By the way, if you look back at the chart of the 10/2 spread, you’ll notice that it’s moving back toward “0.”This is happening as the 10-year Treasury yield surges. As I write Tuesday morning, the yield has popped to 3.32%. This is the highest it’s been since its recent June peak of nearly 3.5%. This is helping drive the weakness we’re seeing in the market this morning. But why are yields surging? Earlier today, the August ISM data came in stronger than expected. Couple that with last Friday’s jobs release, which was also stronger than expected, and it means Wall Street fears the Fed has even more ammunition to keep the pedal to the metal on rate hikes. Translation – bond traders are bailing.
Finally, let’s check in on an indicator that we can interpret two different ways
What’s the state of the Personal Savings Rate in the U.S. today, and what is it telling us?We’ll begin by looking at the data, then we’ll analyze the “why?” behind it. Today, U.S. savings are at the lowest levels in more than a decade. In fact, the last time the Personal Savings Rate was this low (as calculated by the U.S. Bureau of Economic Analysis), it was back in the 2009 financial crisis. Here’s how that looks.
Now, why is this happening?Taken at face value, a narrower spread between income and living expenses suggests Americans aren’t able to store away as much savings for a rainy day. Not good. But there’s another interpretation. What if a narrower spread had less to do with feeling pinched financially, and it was more about the timing of one’s expenditures? For example, maybe Jane Shopper has the exact same amount of disposable income after paying her bills. She could either save or spend this money. But for whatever reason, she decides to spend it instead of saving it. Well, that would lower the personal savings rate too – yet in a way that doesn’t reflect an unhealthy U.S. consumer. But it brings up the question: Why would Jane Shopper decide to buy something now instead of save that money for later? Well, what if she was worried that the price of that item would be getting more expensive in the future? Translation – fear of inflation. Big-picture, today’s small savings rate could reflect a weakened consumer, or a more robust consumer that’s deciding to buy now (potentially due to inflation fears). It’s likely some degree of both. However, news this morning offers an additional clue… According to Epiq’s Bankruptcy Analytics platform, bankruptcy filings across all types rose 10% from a year ago to 35,355. Chapter 13, which is more relevant to personal bankruptcies, rose 15% to 14,981 filings from last month. (Chapter 11 filings, which are more “business” related, surged 81%.) We’ll see if this trend persists. For now, what we know is Americans are saving less and less. And as you can guess from your personal budget, that’s not a long-term recipe for financial success.
Wrapping up, none of today’s data are especially encouraging, but…
A return to happy days is as close as the market believing that inflation is on its way out.That’s because when that happens, the Fed can finally ease up on its hawkish policy. As noted earlier, the next CPI release comes on the 13th. It should be lower than July’s 8.5% number since gasoline has continued to fall. How much lower is the question, and it’s the next must-watch event for Wall Street. We’ll keep you updated.
Have a good evening,