From Chief Investment Officer Tom Veale,
It’s hard to imagine a more confusing situation than what the Federal Reserve has accomplished since the start of the New Millennium. They didn’t just put a thumb on the interest rate scales, they kept a fist on it for most of the last two decades. With market driven forces completely void in their decisions on structuring the yield curve we now have short term yielding instruments with far better yields than bonds with very long maturities.
Maybe we should just turn over the yield curve to an AI bot. Maybe it could do a better job.
Meanwhile, SignalPoint’s Market Risk Indicator is steady and unchanged for the week. Two components were unchanged with the other two only modestly changed and in opposite directions.
Market risk is back where it started 2023 while the S&P 500 has gained slightly. With the MRI where it is, it’s cruising along under a low ceiling of market risk. Upside potential for the major indexes is somewhat limited at this time. There is little room for Price/Earnings expansion and there are headwinds of rising short term interest rates still being anticipated.
When we look away from indexes with large mega-cap stocks included we see a slightly better picture. For instance, Value Line is currently showing a P/E of 16.5 for its “1700 Stock Index” but a more favorable 14.0 for its “Small and Mid-Cap” index. (at the start of March, 2023 these were 17.2 for the 1700 and 15.3 for the Small and Mid-Caps) This indicates the small and mid-cap stocks may offer a better value at this time with median yield of 2.7% (1700 Index yield is 2.4%). One has to balance that better value with the lower sponsorship of small caps, in general.
SignalPoint’s tactical use of equal weight sector ETFs in its domestic portfolios helps to alleviate stresses of mega cap weightings of the well know indexes. Through this design we participate to a greater degree in the smaller cap end of the stock market.
The MRI this week is again 31 with an MRI Oscillator of minus 2 (slight downward risk pressure). With a median value of 26, it’s still a bit on the high side but well short of one standard deviation. Two components are neutral, one cautious and one proactive. The two non-neutral components somewhat cancel each other.