(Bloomberg) — The US economy may have escaped a long-feared recession — pumping up stocks to records — yet investors are still looking over their shoulder this Halloween for gnarly market signals that spell trouble ahead.Think lofty valuations that threaten meager equity returns in the future, the lagged effects of the Federal Reserve’s interest-rate hikes, ever-soaring debt burdens and far more.Here are the charts that are spooking finance professionals right now.
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Emily Roland, co-chief investment strategist for John Hancock Investment Management:
While the next 12-month earnings revisions have been flatlining over the last month at around $267, the S&P 500 is up another 5%. This has caused the valuations on the market to rise to a two-year high, moving closer to 2021 levels.
The S&P 500 forward P/E is now 21.8x and the trailing P/E is now 26.58x. We are at the third highest valuations on the S&P 500 in modern history, only behind 1999/2000 and 2021. If this valuation upside continues, it leaves forward looking returns less compelling.
Dave Mazza, chief executive officer at Roundhill Investments:
An unappreciated risk is the uneven economic recovery, which has increasingly become a case of “two economies.” The wealthiest Americans continue to experience job growth, rising income, and expansion in their net worth, while those at lower income levels struggle to make gains. This wealth gap not only creates potential social and economic issues but also poses longer-term risks for consumer spending and economic stability, as broader participation in economic gains is often a key factor in sustainable growth.
Bob Elliott, co-founder and CEO at Unlimited:
While there is momentum in the short-term for the US to continue to outperform as the Fed pursues “over easy” policy relative to strong underlying growth, the current pricing prices a likely implausible concentration in earnings and wealth into US companies forever in the future. The last time the US showed a market cap share like this was just ahead of the tech bust, and we all know how that went in the years that followed.
Jack McIntyre, portfolio manager at Brandywine Global Investment Management:
The US government pays out more in interest expense than it spends on national defense. Both are not going to be going down anytime soon. It just highlights we’re spending way beyond our means, living on debt and at some point the bond vigilantes will emerge with a vengeance. Maybe as soon as next week.
David Miller, co-founder and CIO at Catalyst Funds:
This looks at forward 10-year S&P 500 returns from the existing cyclically-adjusted P/E ratio. We are at value of around 36x today. When looking at historical data going all the way back to 1900, the forward 10-year return for the S&P 500 was negative 84% of the time at a 36x CAPE. Valuations also remained stretched.
Alessio de Longis, head of investments at Invesco Solutions:
While markets have celebrated the end of the tightening cycle and priced-in multiple rate cuts for 2024 and beyond, we should not lose sight of the fact the previous tightening cycle was one of the most aggressive in history, both in magnitude and speed, and that its lagged effects are still making their way into the economy and financial system. While every cycle is different, historical evidence over multiple cycles reminds us it can take up to two years for markets and the economy to fully incorporate the impact of monetary policy. Therefore, it would not be surprising to see decelerating growth over the next few quarters. This scenario does not necessarily mean a recession, but still flags downside risks to growth and risks skewed to higher equity market volatility.
Mean reversion in asset prices would likely bring a convergence in performance between risky and safer asset classes, with fixed income likely to perform well and defensive sectors, quality, and low volatility equities to outperform the market.
Wes Crill, senior investment director at Dimensional Fund Advisors:
Here’s a scary thought: Your Halloween candy stash might outlast many currently available ETFs. In fact, 140 ETFs have already closed during the first three quarters of 2024. This continues a long-standing trend in the industry of ETFs closing almost as quickly as they can be launched. Growth in the ETF landscape has provided investors increasingly greater options for their portfolios. But the attrition numbers are a reminder that investors need to assess what’s under the hood of these strategies and select asset categories that align with their long-term objectives. That may help avoid chasing a flavor of the month investment – especially important if that flavor is like candy corn.
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