Another 7% rally in China yesterday (depending on the index) combined with the Fed's new aggressively dovish outlook on interest rates, and the stock market is finding a reason to buck the negative seasonality trend and continue to climb the wall of worry.  The indices made their highs of the day near the opening bell so there was some immediate profit taking , but the bears don't seem to want to step in front of this upside momentum, despite what the calendar says.  Jobless claims came in favorably, helping the rally.

Daily TSP Funds Return More returns

This is what is going on in China after they announced some massive stimulus to give their economy a boost, which has been languishing for a few years.  Massive stimulus from an economy this size will influence the rest of the global markets, and that's what we're seeing this week.

          

Here's a longer-term chart, which shows how far it had fallen from the post covid highs. 

The EFA was up 2.14% yesterday and the new "ex USA ex China ex Hong Kong Index" was up 1.39%, so I would expect an I-fund return for Thursday to be somewhere in between the two.  China IS NOT a part of either of these funds / indices, but as I said, other global markets are reacting to this stimulus.

        

We're still in limbo on the I-fund's transformation to the new components so guessing at the return before the TSP posts the price is a little tough a the moment.  You will see the final price and return posted on our site by Thursday evening.  Here's more information from tsp.gov.

As far as our markets go, talk about bad timing - is this the time to talk about valuations, now that the Fed and China are loosening monetary policies?  The US stock markets are no bargains as they trade well above their 10-year price to earnings ratios.  The Russell 2000 is the most reasonably valued index with it trading in line with its P/E average, but the others...

       


This chart from Hussman Funds, typically a value oriented money manager, shows how price / earnings, adjusted for margin, are still near all time highs.  It's difficult to see here but you can click on the chart to view a larger version of the chart, where the prior peaks were - one being being the late 1920's, then the dot com bubble of the late 90's and early 2000's, and finally there was also a valuation peak before covid hit.

        
                  Source: https://www.hussmanfunds.com/comment/mc240923/

As well as the market is performing, there are some concerns, but monetary policy is favorable and perhaps this gets stretched even further before repairing, pushing the inevitable down the road a little.  In the short-term, trend and momentum do outweigh longer term valuations.

The 10-year Yield was up again and it's probably OK at this point, but if we start seeing 3.9% or higher, the stock market may get a little cranky.  The resistance is below that level.

         


After yesterday's Initial Jobless Claims report came in better than expected, the PCE Prices inflation report and the Personal Spending data come out before the opening bell.  As I mentioned a few weeks ago, don't expect to see any negative economic reports between now and the election, or at least I would be very surprised to see one unless it also supports the case for lower interest rates.
 

The S&P 500 (C-fund) rallied early after the response to China's market and the initial jobless claims report, but it hit the top of that rising resistance line and backed off.  The old breakout level and the bottom of that open gap are still potential downside targets, if and when the F-flag breaks down.

        


The DWCPF (S-fund) continues to trade flat although it did rally yesterday to negate Wednesday's breakdown.  Small caps have been very inconsistent lately - sometimes leading the large caps indices, and sometimes trailing.  There's a good case for a breakout here if the small caps are planning to follow the S&P 500 chart, but again, negative seasonality is supposed to matter for the next few weeks.

       


BND (F-fund) was flat yesterday as it continues to hug the support from the 20-day EMA, which has been flattening out.

Thanks so much for reading!  Have a great weekend!

Tom Crowley


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