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No Reaction To Yellen's Speech

Brouwer & JanachowskiAugust 29, 2016

The Week Ahead: Watch for more reaction on Treasuries. NFPs on Friday.


The market feels choppy but stocks really haven’t moved much in August. On Friday there was a 1.5% midday correction but it regained to finish unchanged on the week.  We like holding patterns. This week brings the new jobs (NFP) numbers on Friday. August numbers tend to be lower than the previous three months, so room for disappointment.

Yellen at Jackson Hole: on the day that Q2 GDP was revised down, again, Chair Yellen spoke at the annual central bankers’ convention. She said they might hike in September (they won’t) or later on (they shouldn't). She also said the Fed could add more tools (good, but they won’t) and that fiscal support would be really useful (yes, any day now). All in all both the Ten and Two-Year Treasuries moved up 5bps and the dollar barely moved. So more of the same.

Are Markets Expensive? Part 3: we talked about this here and here and came up with the answer “No, not really.” Here’s another one that, admittedly, uses the Ten-Year Treasury as the jumping off point.


Here we convert the U.S. Treasury note into a Price/Earnings ratio. If you buy a Ten-Year note today, at 1.59%, you effectively pay 62 times earnings. That's the blue bar chart and it was 20 times (using RHS) before the financial crisis. It’s now at an all-time high and twice its average. The P/E on the S&P 500 was around 12 before the financial crisis and is 17 now. It’s around 13% above its average So, if you take the ratio, stocks look undervalued… or bonds very overvalued. The point is valuations are relatively high, can remain so and we’re not overly concerned.

Market Appears Volatile, but it’s not. This is a bit of a messy chart but there’s not a better way to show it.

small 2vix_VIX-CBO
small 2vix_VIX-CBO

There’s the VIX, the so-called fear index, which no one should pay much attention to until it hits over 30. It’s at 14 now. The more interesting line is the standard deviation of the S&P 500 over the last three months. It’s about the lowest it has been for some years. It’s the same on the U.S. Treasury side too. The trading band for the Ten-Year Treasury has been within 7bps for the last month. We thought August would be quiet but, heck, anyone out there?

Healthcare & Banks, here are two interesting charts. So, how have health care and banks been doing? Well, here are the banks:

small 3banksROE_SP629-SPX
small 3banksROE_SP629-SPX

So, that would be a halving of ROE in the last nine years and share prices that have gone nowhere since 2001. We’ll leave it to others to comment on the fines, the regs, wealth destruction and all the traumas facing bankers these days. Better over in healthcare?

small 4healthcareROE2_SP565-SPX
small 4healthcareROE2_SP565-SPX

Less of a decline in ROE but, again, a big underperformance since last July. Some of this is the backlash from companies like Theranos, Turing, and recently Mylan and St Jude. Also some mergers have been blocked and there’s a lot of uncertainty. So, this is a market that has not been kind to all players.

Bottom Line:  The last week of summer. Possibly, just possibly, Europe may get interesting. But we’re making no major changes to portfolios.


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--Christian Thwaites, Brouwer & Janachowski, LLC

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