While analyzing various investment sentiment indicators, the biggest theme that stands out in the market at this time is uncertainty. As an example, the AAII investment survey reports that almost 41% of investors are neutral compared to bearish or bullish, which is 10% higher than the historical average.
This uncertainty stems mainly from poor employment reports, weak retail sales, slower corporate revenue growth, questions around the extent of China’s economic slowdown, the upcoming June 23 referendum on whether the U.K. will remain a member of the European Union and a richly valued stock market wrapped inside a low yield environment.
All this noise has created a flight back to yields and safety. The utility, consumer staple and healthcare sectors have performed extremely well. Financial stocks have been hit hard to the downside due to the expectation that the FOMC will not raise rates this summer.
The S&P 500 index hasn’t been able sustain a price break above 2100. Over the last 18 months the S&P 500 index has traded above that level 25 times prior to correcting and falling in price. It has been a counter trend traders dream.
If the index is able to reach a new high above 2128, it could easily spike higher due to the low yield environment, high margin debt levels being used and the persistent corporate stock buybacks that continue to prop up the market. If this occurs, we could end up seeing the most expensive overall stock market in U.S. history based on the valuations that I follow.
As a value investor, that worries. I’ll continue to exercise caution until fundamentals catch up to metrics or vice versa. It has served me extremely well over the years, although it does lead to the occasional short-term underperformance while the market corrects itself.