The index of leading economic indicators (LEI) for August released last Friday, advanced 0.2%, which was less than expected. Single family housing starts declined 14.4%, however, that reading follows a sharp increase of 22.9% in July. From month to month, housing data is notoriously volatile, but the longer term trend is useful. The 12-month moving average stands at the highest level since October 2008.
Credit Market Indicators:
Real and Nominal Yield Curves YTD change and since the end of August– Treasury Yield Curve
The nominal curve has flattened significantly since the beginning of the year, with long term rates dropping and more recently, intermediate term rates increasing. Within the last 3 weeks, however, this trend has reversed. Just in the month of September, there has been a near 25 basis point move higher along the 7 to 10 year portion of the treasury yield curve.
Interestingly, the real yield on the 5 year note has turned positive and has jumped 40 basis points month to date.
Current Shiller CAPE Ratio:
The CAPE ratio remains significantly higher than its historic mean of 16.55 with a Shiller PE Ratio of 26.5 at the close of market Friday. While not useful as a timing indicator, elevated CAPE levels have correlated strongly with less than historic levels of annualized equity returns on a forward looking basis.
With the S&P 500 Index advancing last week, fueled in part by the enthusiasm surrounding the Alibaba IPO, the VIX ended last week at a 12.21 level, down from the prior week’s 13.31 reading.
Near term momentum continues to strongly favor domestic stocks over developed international equities. Nearly all domestic sub-categories were up last week and nearly all international categories were negative. REITS and emerging market stocks have been two of the more resilient asset classes over the past few months, but last week they were among the weakest equity categories. Sluggish economic growth in Europe and China along with escalating global tensions is weighing on international stocks.*