Summary:The Fed’s recent hawkish announcement has caused large market corrections. We see increased volatility risks in the near future for the U.S. equity market. And at the same time, overall valaiton of the equity market is still elevated. In particular, I am seeing especially high valuation risk in traditional “safe-haven” sectors such as REITs and utilities. Instead, we see some good opportunities overseas, and investors could consider both ex-US Index Fund such as VEU or individual stocks like BTI and CNI.
We use the following market sector dashboard to put our finger on the pulse of the market and its major sectors. Feel free to download or export the google-sheet via the following link:Market Sector Dashboard -> https://docs.google.com/spreadsheets/d/1GGf9a66XMYmjJCu3qaYaNCVKCr0ZWCvuS6UoC-v9wYM/edit?usp=sharing
The detailed mechanism of the dashboard is provided in myblog article here -> https://seekingalpha.com/instablog/48844541-envision-research/5704237-market-sector-tools-added?source=instablogs_title
Especially, the simple yield spread (the TTM dividend yield minus the 10-year Treasury rates) is the first thing we look at. They give us a 30,000 feet view of where to look further - which sector, growth stocks, value stocks, bonds, or precious metals, et al. We will detail the meaning of each entry in the next section, and we update the dashboard monthly.
As you can see from the dashboard, despite the large corrections that have happened over the last week, the overall U.S. market together with all its sectors are still expensively valued. In particular, the utility sector represented by XLU is currently one of the most overvalued sectors based on its yield spread relative to the risk-free rates. Its yield spread is near a dangerous level in our view as indicated by the extremely negative dividend spread yield Z-score (-2.26).
Instead, we see some good opportunities overseas and investors could consider both ex-US Index Fund such as VEU. VEU’s valuation is currently near a multi-year bottom compared to the U.S. market represented by VTI as you can see from the 2nd chart below. To wit, historically, VEU’s dividend yield is on average about 1.25% above VTI. And currently, it is close to 2%, not only far above the historical average but also near a peak level since 2014.
If you’d like to see a more detailed analysis of the VEU fund or some overseas stock ideas, visit our Shopify Sitefor more in-depth reports -> https://envisionret.myshopify.com/
. We have a more in-depth report detailing VEU and two individual stocks: British American Tobacco (BTI) and Canadian National Railway Company (CNI).
Comments