Devoted to understanding the basics and fundamentals of investing

I spent some time describing economic cycles and their impact on investments.  Today in staff meeting we had an update on where the data show we might be.  I'd like to share it with you.

In the Liquidity Cycle, we are in a restrictive period with the Fed raising interest rates over the last two plus years.  When this happens, it is important to look for road signs that indicate that the economy is beginning to slow.  What do the data show?

• Employment growth is strengthening but not into strong outlook yet. 
  
• The ISM indexes all show readings above 50 indicating economic growth. Bank lending standards for small businesses have tightened a little, but are still in "Easier" territory. 
  
• One of the key signs of inflation is a rising Employment Cost Index.  It has risen a little in the last two quarters but is still at a very low level. 
  
• Capacity utilization is rising but not into constrained supplies yet.

The economic environment is healthy, growing and not bumping into limits yet.
Next, we look at valuations in a couple of markets. 

• Small Cap stocks appear to be rich compared to Large Cap stocks
  
• Growth appears to be poised to outperform Value over the next 12 months
• The 10-year Treasury Note appears overvalued and has a bearish outlook
• The Option Adjusted Spread (OAS) on Agency bonds is at its mean
• The OAS on Mortgage-Backed Securities, investment grade corporate bonds, and high yield bonds are all below historic means.
• Gold has outperformed bonds.
• S&P 500 Price/Earnings ratios have fallen to close to normal levels.
• The EAFE stock index appears undervalued.

We also look at Momentum and Trend in markets.

• 95% of 42 world markets are in bullish territory.  The economies of 60 countries are all growing at the same time.
• US stock market momentum indicators are positive but mixed.
• Momentum does not favor Growth Stocks or Value Stocks right now.
• From a momentum standpoint, bonds are slightly favored over stocks and cash is favored over bonds.
• Momentum continues to favor Small Cap Stocks over Large Cap Stocks.

Finally we look at Investor Sentiment.

• Stock and Bond volatility is quite low. 
  
• Stock market investors are optimistic.
• Optimistic consensus among stock market investors is slightly bearish but not to extreme levels yet.
• The US Trade weighted dollar has rolled over and is falling.

Where does all this leave us?  Near neutral but still slightly bullish on stocks, bearish on bonds and bullish on cash.

Now go out and make some money!