Another poor number on the employment front.  In addition, June was revised down by almost 50%!!

So, for today, bonds have seen a reprieve from the selling.

While I am feeling ok about my bet on bonds, both maturity and credit, I am less confident on stocks (not sleeping well if truth be told).
My exposure is high around 55% and I am trying to justify it.  Walking through the rationale with this blog helps me clarify my thoughts so, I will attempt to do so.

Estimated earnings on S&P 500 is about $110 as far as I can tell.  This is a moving target, but I think it's close.  With the index at 1660, that puts the forward PE ratio at about 15.1 and the earnings yield E/P at 6.62%.  With 10 year treasuries at a bit less than 3%, that leaves the risk premium for stocks around 3.7%.  Historically, this is still a good signal for owning stocks (anything north of 3% has rarely resulted in negative returns for stocks.

However, we are not in super cheap territory and any surprises in the inputs and stocks don't look as attractive.  For example, if bonds yields creep up to the 3.5 area (would not surprise me in the short term) or earnings start to falter.  This latter possibility is the one that has me worried.  While I feel that companies will do well enough to pay their debts, I am not so sure the market will be happy with earnings growth prospects.  We have not seen any top line growth to speak of and ultimately, the market will focus in this and revise the multiple they are willing to pay for stocks.  We could see a return to stock premiums of 4.5% which would imply a PE of 13 and an index level of 1430!

Presumably, there is a counter-case - earnings continue upward, we get a surprise in top line growth, rates go lower.  All of these are possible in which case, we could get a move up, but it is difficult to see any more PE expansion.  Maybe 16 is possible, but I would be surprised.  I don't think you get a big move into stocks if bonds keep falling in price because overall the economy is leveraged and rates do matter to earnings.  I would rather feel strongly about growth from top line rather than squeezing pennies from costs.  But, that does not seem to be the most likely outcome.  Perhaps the biggest  upward pressure is from funds being underinvested, but with our fiscal picture unclear (and more war possibilities) I think the macro picture is murky enough to hold funds from making large allocations to equities.

So currently I am seeing limited upside for stocks and some serious potential downside.  I don't normally make short term timing bets, but I am considering doing so and using some technical indicator (like our previous high- 1703.50ish) as a stop loss level.  Or, using the 16 multiple which would take me to 1760.  The trouble from the technical side is that I see support around the 1636 level and we are closer to that, so from a risk reward perspective, it makes sense to wait to see a break of that before acting.  Disclaimer:  I AM NOT A TECHNICIAN, so anything I do on that front is probably mularkey!

The most sensible approach is to moderate my exposure back to benchmark levels around 45%, or maybe a touch lower then maybe I can get some shut-eye.