From Chief Investment Officer Tom Veale,
Here’s the final look at 2023 in a bit more detail. First, overall the Market Risk Indicator finished the year slightly lower than a year ago.
The MRI is composed of four component indexes covering various aspects of the market. First up is our Relative Valuation Index. Currently it’s not showing much change from the start of 2023 but also isn’t in its happiest range. It’s 23.12 now compared to 23.60 a year ago. Anything above 22.75 is considered cautious territory.
A year ago Value Line’s P/E was at 16.0 but we start 2024 with it at 17.7. That’s about 10.6% higher. We could subtract that from the S&P 500’s 2023 gain to get a feel for the stocks’ returns without P/E “inflation.” So of the S&P’s 24% rise, about 14% of it was through growth while the remaining 10+% was P/E expansion. This, as mentioned in previous reports, creates headwinds for further gains.
Next we’ll look at speculative activity. 2023 was a year of relatively mild speculation by investors overall. The SignalPoint Speculation Index started 2023 at 4.7 and moved around its median value through most if the 12 month period. It starts 2024 at 16.0, significantly higher than a year ago. It’s still within the neutral territory but, again, shows some upward risk pressure.
Speculation can co-exist with rising market prices for a very long time, so it’s not worrisome at its present level. We’ll watch this as the New Year unfolds to see where the money flows.
How much cohesion is there in investor sentiment? Our SignalPoint Divergence Index was built to measure such things. We know just how fickle markets can be, so our Divergence Index shows this jumpy nature quite well.
Various bullish indicators have been similar in showing investor consensus rising during the last month or so of 2023. Compared to a year ago when this index was 5.0, we see a satisfactory signal of 2.7 for the start of 2024.
Finally, we’ll look at where the IPO/New Issues markets have been over the previous 12 months and 3 years.
A year ago our IPO/New Issues Index stood at -2.01 which is in the “Proactive” range of this component. It indicates that the overall number of stock issues available to investors was contracting at that time. That continued all the way through the year’s end and we start the New Year with it at -2.73 and still proactive. Looking back to 2021 we see just how much of a ‘bubble’ was present in the IPO market then. It takes a long time to consolidate all those new issues and blend them into established common stocks.
So, we start 2024 with one cautious MRI component, two neutral ones and one that’s somewhat proactive. If we weight these as to their individual meaning in the bigger MRI picture, we could say that the fad of IPO investing has faded while traditional stock speculation has stayed relatively steady. We could also say that investor sentiment is improving with little divergent thinking right now. Finally, stock valuations are pricy and will either take a drop in short term interest rates or an improvement in earnings to justify current prices. Keep tuning in to SAM Market Risk Reports for future updates.
Best regards in 2024,
The MRI comes in at 29 again this week with the MRI Oscillator showing +5 or upward risk pressure continuing.