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July 20 – S&P 500, SPY
Premium Video: A Low-Interest Rates May Push S&P 500 Into New Territory
The week of July 22 will be a busy one, between earnings and economic data. A big second-quarter GDP print will conclude it on Friday morning. Currently, the consensus is for 1.9%.
GDPNow is forecasting growth of 1.6% in the second quarter, but their forecast has been running light the last few quarters, and there is still one more estimate that needs to be plugged into the model later this week. I put together this table so you can see what I mean.
The GDPNow forecast has only overestimated the final GDP reading on two occasions over the past 7 GDP prints. Meanwhile, it was under the actual results five times, with an average difference of about 0.5%, which is a pretty wide margin. So while it is unlikely that we will see a 3% print this quarter, it seems possible that we see something around 2.1 to 2.4%.
1Q’19 |
GDPNow Forecast 2.7% |
Initial BEA 3.2% |
4Q’18 |
GDPNow Forecast 1.8% |
Initial BEA 2.6% |
3Q’18 |
GDPNow Forecast 3.6% |
Initial BEA 3.5% |
2Q’18 |
GDPNow Forecast 3.8% |
Initial BEA 4.1% |
1Q’18 |
GDPNow Forecast 2.0% |
Initial BEA 2.3% |
4Q’17 |
GDPNow Forecast 3.4% |
Initial BEA 2.6% |
3Q’17 |
GDPNow Forecast 2.5% |
Initial BEA 3.0% |
The GDP reading will also come about a week before the next Fed meeting so that it will carry a great deal of weight on the Fed’s decision.
The FOMC rate watch tool is all over the place, with the odds swinging for a 50 basis point rate cut from low to high literally overnight. As of Friday night, the probability of a 25 basis point cut is now back to 78%, and a 50 basis point is now down to 22%.
If anything, it proves just how unsure the market is, and that it has no clue what to expect.
The most likely scenario based on what I have seen in the past: a cut by 25 basis points this month and signal a strong chance for another cut in September. But remember in August is the KC Fed Jackson Hole summit, and that will allow Powell to tell the market another rate cut in September is all but inevitable.
Earnings Estimates
Moving on, I am now modeling 2020 earnings estimates of $181.99, with a one standard deviation range of $171.77 to $192.20. This will be the first time I am revealing the chart below to you because I finally have more than a month’s worth of data. The estimates have a hard to see lower drift to them, but it is there.

In the next chart, I map out the changes in the PE ratio for the S&P 500 using my estimates, accounting for the one standard deviation range in the forecast. We can see that the S&P 500 is currently trading are 17.5 times the worst-case scenario earnings estimates of $171.77 per share, about 5.6% below the current actual forecast of $181.99. It makes the S&P 500 fully valued based on the worst-case scenario estimates. However, it is still undervalued based on the base case scenario, trading at roughly 16 times 2020 estimates.

Stocks Vs. Bonds
Stocks are still relatively undervalued compared to bonds, although in recent days the spread between the 10-year yield and S&P 500 SPDR (SPY) dividend yield has widened to roughly 21 basis points. It had fallen as low as 15 basis points at the start of July. It does show that the spread is the narrowest it has been in some time.

While the spread isn’t inverted currently, it is at a low enough point, that historically, it suggests that equity prices should do fairly well, as noted in the chart below.

15:45
Defined Terms and Jargon:
• Baltic Dry Index (BDI): A measure of shipping rates for raw materials, often viewed as an indicator of global economic activity.
• Inverse Head and Shoulders Pattern: A bullish technical chart pattern indicating a potential reversal of a downtrend into an uptrend.
• Diamond Reversal Pattern: A technical chart formation indicating a potential trend reversal, characterized by price movements forming a diamond shape.
• QE (Quantitative Easing): A monetary policy where central banks purchase assets to inject liquidity into the economy, generally lowering interest rates and weakening currency.
• Rare Earth Metals: A group of chemically similar metallic elements crucial for advanced technological and industrial applications, including electronics and defense.
• Inflation Swaps: Financial instruments used by investors to speculate on or hedge against future inflation expectations.
• Control Group (Retail Sales): A subset of retail sales data that excludes volatile components and provides a clearer view of consumer spending trends.
• HGX (Philadelphia Housing Sector Index): An index tracking performance of housing-related stocks including home builders and commodity producers.
• Implied Volatility Dispersion Trade: A market strategy involving options, exploiting differences in volatility between an index and its individual components.
• Correlation Index: An indicator measuring how closely individual stocks move together, used for gauging market risk and sentiment.
Please remember to leave questions in the comments. I’ll be back later. Bye.
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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9:07
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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11:40
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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Conclusion
So while over the short-term, the market may or may not experience some volatility due to changes in Fed interest rate expectations. The current set up in stocks still appears to be reasonably bullish. With a 25 basis point cut coming in July, and another likely in September.
Based on my current expectations for earnings in 2020, I still think the S&P 500 could rise to around 3,200. Meanwhile, should interest rates remain at these present or lower, I can see some further multiple expansion pushing the index perhaps to as high as 3,300.
-Mike
Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.
Subscribe to receive this FREE daily commentary directly in your email
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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