As we have stated in our latest Investor Quarterly Letter, we expect financial markets to remain generally volatile for the reminder of the year. Too many cross-currents are converging such as constant trade war threats, monetary policy changes and possible inflation pressures. However, the underlying fundamental elements continue to be positive: global centralized growth and corporate earnings are still going strong.
The recent correction has also reduced valuations, which at the beginning of the year were higher than historical averages. Assuming that no trade war (or war of any kind for that matter) will erupt, equity markets are a better proposition today. The following charts show the pulse of the market from different technical perspectives:
The percentage of stocks in the SP500 that is now trading below the 50 day moving average is two standard deviations below its historical average. In the past three years, such levels have indicated oversold conditions (source: www.indexindicators.com).
The Equity Put/Call ratio is currently in neutral position. It correctly called the top in February when a significant amount of call was traded over puts (source: www.indexindicators.com).
Data from the American Association of Individual Investors (AAII) are showing a significant shift toward bearish opinions. This indicator is used as a contrarian piece of data. We are not yet at levels seen at the 2016 bottom but we are getting close.
From a fundamental valuation perspective, Forward P/E ratios and Price to Book ratios on the SP500 index are now perfectly in line with 25 years averages. Earning Yields spreads (EY minus Baa yield) are actually above historical averages indicating undervaluation of equities over bonds (source: Guide to The Markets, JP Morgan).
While volatility will probably remain, better conditions are emerging in the markets.