MARKET UPDATE MAY 2024

Stocks have rebounded nicely in the last three weeks.  Both the S&P 500 and the Nasdaq are now at new all-time highs.

Between November of last year and the third week of March this year, the S&P 500 and the Nasdaq (top two lines) moved sharply higher.  All three major stock indices pulled back in April and rebounded in May. 

Inflation data, interest rates and recession concerns continue to drive the markets in both directions.  Even slight changes in inflation are generating strong reactions from the market. I find it to be surprising that a 0.1% change in the inflation reading generates such a strong reaction from the stock market.  I doubt that the inflation data is even accurate to one tenth of one percent. 

Our valuation model is now showing that the S&P 500 is slightly overvalued after the big runup since last November.  As of May 1st, our Market Value Indicator suggested that the S&P 500 was about 3% above its fair market value.  That has increased to about 8% so far in May.  This level of overvaluation is not very concerning, but we will keep an eye on it.

Notice that the S&P 500 was overvalued by about 16% before stocks began to fall in January of 2022. It was not just inflation and interest rates that contributed to the bear market of 2022.

We do not use Market Valuation as a trading variable.  It is not very useful in the short term.  It does have value for the long-term direction of the market. 

Stay Disciplined my Friends,

Phil

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