The Dow crossed through the 22,000 level for the first time ever last week to grow 1.2 percent and has now hit new highs on eight straight days, but much of the street talk centered on stock valuations. The S&P 500 was up only marginally – it has now gone 12 days without a move of 0.3 percent in either direction, the longest such streak on record – while the Nasdaq was down 0.4 percent. Small caps lagged even more. Pretty much everyone concedes that stocks are at least a bit overvalued, but (as has been the case for quite a long time) nothing else looks cheap. Moreover, the range of valuations remains wide. Just looking at the 30 stocks in the Dow shows a valuations range from nearly 40 percent overvalued (Caterpillar) to about 20 percent undervalued (GE). A strong earnings report from Apple helped to push the Dow over the line.
If you are looking for something more short-term to worry about, recall that Congress has yet to raise the government’s debt ceiling. It is estimated that the U.S. Treasury will run out of money on September 29. A Republican Congress and a Republican president should mean that the debt ceiling will be a non-issue, but the high level of dysfunction in Washington suggests that no deal should be assumed. Traders aren’t using the debt ceiling as a reason to sell just yet, but with stocks trading near all-time highs and valuations also high, few are aggressively buying either.
A solid employment report on Friday offered some relief after a week of mostly negative economic news, even if it didn’t bring much of a market pop with it. Car sales remained the biggest downer, with significant sales declines and inventory growth despite some healthy incentives. June consumption data was also unusually disappointing, with almost no growth at all between May and June. Wage and income data from the same report also continued to slump year over year. Pending home sale, construction spending, and ISM Purchasing Manager surveys also managed to disappoint. Jobs, on the other hand, showed another month of growth (209,000 jobs) in excess of the 12-month average and the consensus forecast. July was the 82nd consecutive month of job growth. The unemployment rate fell to 4.3 percent, matching a 16-year low.
Bond yields trended lower again, further indication of traders being less than all-in on stocks. Most analysts look for the Federal Reserve to tighten policy, starting the process of shrinking its balance sheet at its September policy meeting and raising its federal-funds rate target another quarter-point in December. The fed-funds futures market remains unconvinced on the latter, however, seeing only a 40 percent probability of such a move, according to Bloomberg.
Healthcare reform looks dead, at least for now, but healthcare costs remain. A healthy 65-year-old couple retiring this year can expect to spend $322,000 (in today’s dollars) on Medicare premiums and dental insurance during their retirement, according to Healthview Services. Add deductibles, co-pays, hearing, vision, and dental cost sharing, and that figure rises to $404,000.
Foreign stocks continue to outperform as developed nation, emerging market, European, Chinese and Japanese stocks all had good weeks. India continues its spectacular performance, up over 1.5 percent last week and over 30 percent in 2017. Valuations are much cheaper overseas than in the U.S., which is a major point for many.