A picture is worth… you know how it goes. But we will just add a few bits of our observances on the graphical displays of data.
The spider chart below does not include data from today's strong labor report, but it shows what matters – the trend improving in leading indicators, especially payroll related.
The bull market over the past five years brings us back to loftier valuations. Price is what you pay and value is what you get, as they say. Values today are more expensive as measured by the Graham Dodd Price to Earnings ratio (also known as the Shiller PE).
This single metric, which smooths out the business profits cycle, explains nearly half of future returns over the next ten years (R-squared of .45). Investors need not run for the hills but should temper expectations from this price level since real returns maxed out at 6.5% and were as low as -3% in the past.
A cheaper area today is emerging markets, but it is so for a reason. Many country interest rate structures are inverted; meaning short dated debt (a few months to 2 years) has a higher interest rate than long dated debt (10 years). This is a telltale sign of recession or dramatically slowing growth. In turn, it feeds into corporate performance and increasing negative Earnings Per Share (EPS) surprises.
While many people cite the problems of debt here in the U.S., our counterparts in other Developing Markets (DM) and now even Emerging Markets (EM) over the past couple of years were not shy about leveraging up. DMs actually paid down debt.
A bright spot over the last quarter was Europe. Investors finally recognized the improving local economies and the attractive valuations. The European Central Bank’s interest rate cut this week could add fuel to the fire, though it did put a stop to the Euro’s ascent so far this year.
Hopefully this quick trip around the world gives a feel for what we read in the data.
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