To where are we going?  Only history can answer this question but history can offer some precedence.

There are now three companies worth $2 trillion or more; APPL, GOOG and MSFT.  Tesla is worth more than all other auto manufactures in the world combined and worth more than the entire energy sector of the S & P 500.  Bloomberg writes there is no longer the “Nifty Fifty” but the “Incredible Five” that is worth more than 25% of the S & P 500.

Because of the FANG dominance, the S & P 500 and the NASDAQ is trading at the highest price to sales level in history and the highest price to book and price to earnings ratio than any other time barring the 18 months of the dot-com bubble in 1999-2000.

Regarding the bond market, TIPs are trading at record highs as Treasury real yields are at record lows.

Fixed income trading 101 dictates that bond prices are dictated by present and future inflationary expectations.  As measured by the core PCE-or the preferred inflation index of the Federal Reserve— the 4.4% inflation rate is at the highest level since 1991.

Regarding future inflationary expectations, according to the Federal Reserve Bank of New York, household expectations for inflation for the next 12 months climbed to 5.7% in October from 5.3% in September.  Median expected inflation over the next three years rose nominally to 4.3% from 4.2%.  Both figures are the highest since the survey began in 2013.

Yesterday Bank of America wrote that dividend growth might be the best reason to own the S & P 500 given that its research is suggesting the S & P will have a total return -0.5% per annum through 2031 given valuation levels and interest rates.

In a 2007 highly publicized study, data suggested then 85% of the return in the S & P 500 from 1900 until 1995 was via dividends and 15% from capital appreciation.  From 1996 through 2007 it was the inverse…85% from capital appreciation   (aka  PE expansion).  I do not know the ratio from 2008 until today.

Is Bank America suggesting a return to the norm?

As noted many times interest rates are the largest variable of valuation formulas for such discounts present and future values of cashflows.

Today the Producer Price Index (PPI) is released.  Consensus is expecting an increase on levels, the result of food and energy.  The headline index is expected to increase by 0.6%, 0.5% ex food and energy.

What will happen today?

Last night foreign markets were up.  London was up 0.17%, Paris up 0.33%  and Frankfurt up 0.27%.  China was up 0.24%, Japan down 0.75% and Hang Seng up 0.20%.

The Dow should open flat.  The 10-year is up 8/32 to yield 1.47%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.