Long-time readers of this column know that I like to fly helicopters for fun. I caught the bug when I served as editor-in-chief of Rotor & Wing magazine, the “bible” of the rotorcraft industry.

Last weekend, I was with a pilot instructor in the cockpit of a Bell 407 when we encountered turbulence at about 3,000 feet.

The instructor saw the nervous look on my face and said with a mischievous grin: “Gravity! It’s not just a good idea. It’s the law.”

Those words could be applied to the stock market. In the investment world, valuation is the closest thing we have to the law of gravity. Equities continue flying higher, but by almost any valuation yardstick, stocks are pricey. Overpriced equities inevitably fall to earth.

To be sure, earnings and economic data paint a bullish picture, but the U.S.-China trade fight keeps getting nastier. Stocks today ended mostly lower, with the Dow Jones Industrial Average and S&P 500 in the red. The tech-heavy Nasdaq rose to post an eight-day winning streak.

Wall Street remains preoccupied with the latest antics of Elon Musk, eccentric founder and CEO of electric car maker Tesla (NSDQ: TSLA). On August 7, Musk tweeted that he was considering taking Tesla private at $420 a share. The stock immediately surged, nearly hitting an all-time high. But today, as Musk’s plan increasingly appeared tenuous, TSLA shares fell 4.83%.

Nosebleed altitude…

On August 22, the stock market will officially become the longest bull run in history (unless it crashes before then). The previous record-holder was the 10-year bull that died when the dot.com bubble burst in 2000 — an ominous parallel.

Consider one telling measure of valuation, the price-to-sales (P/S) ratio.

The median S&P 500 P/S ratio currently stands at 2.63 times, more than double the 1.23 times in February 2000 right before the market nosedived. The P/S ratio isn’t as widely cited as the price-to-earnings (P/E) ratio, but it’s based on revenue and therefore less prone to manipulation.

The P/S ratio is flashing yellow, but investors are taking their cue from the government’s economic numbers, which have been flashing green.

The U.S. Labor Department reported this morning that the producer price index (PPI) was flat in July, below expectations of a 0.2% gain. The “core” PPI rose 0.3% for the second straight month. The core rate strips out volatile food, energy and trade margins.

The PPI measures wholesale price changes before they reach the consumer. The flat PPI reading pulled the 12-month rate of wholesale inflation down to 3.3% from 3.4%. The 12-month rate of core PPI advanced to 2.8% in July (see chart, compiled with data from the U.S. Bureau of Labor Statistics):

Gas prices and other energy costs fell after two months of robust gains. The price of soybeans and other oilseeds fell 14%, the most in four years, stemming from a surge in soybean stocks after China imposed tariffs on them in retaliation for U.S. tariffs.

These figures, coming after two months of large increases, signal that overall inflationary pressures are softening. That pleases Wall Street.

Meanwhile, earnings have been strong. Investors have rewarded positive earnings per share (EPS) surprises, but they’ve also harshly punished negative EPS surprises.

According to research firm FactSet, S&P 500 companies that have reported positive EPS surprises for the second quarter have enjoyed an average share price increase of +1.1% two days before the earnings release through two days after the earnings. Firms that have reported negative earnings surprises for the quarter have experienced an average price decrease of -2.4% two days before the earnings release through two days after the earnings.

Sectors with the highest percentages of companies reporting EPS above estimates are telecommunications (100%), health care (96%), and technology (93%). The sector with the lowest percentage of companies reporting EPS above estimates is energy (48%).

The Soprano trade policy?

The trade war continues to pose a threat to global economic growth and financial markets.

The World Trade Organization (WTO) reported Thursday that the global trade in goods will probably slow in the third quarter, as trade conflict dampens export orders. Automobile production and sales are expected to be among the hardest hit segments.

The WTO’s quarterly outlook index, a composite of seven forward-looking components, showed a reading of 100.3, down from 101.8 in May and 102.3 in February. The WTO said the reading shows “an easing of trade growth in the coming months.”

Ugly trade rhetoric flared up Thursday, when Chinese state media accused the Trump administration of a “mobster mentality” for its imposition of tariffs against China.

Beijing hammered home the gangster metaphor, stating: “China continues to do its utmost to avoid a trade war, but in the face of the U.S.’s ever greater demand for protection money, China has no choice but to fight back.”

China yesterday slapped 25% tariffs on $16 billion worth of U.S. goods, in retaliation for U.S. tariffs of 25% on $16 billion worth of Chinese goods. The world’s two largest economies have gone to the mattresses, with investors caught in the crossfire.

Thursday Market Wrap

• DJIA: 25,509.23 -74.52 (0.29%)
  
• S&P 500: 2,853.58 -4.12 (0.14%)
  
• Nasdaq: 7,891.78 +3.46 (0.04%)
  

Thursday’s Big Gainers

•  Belmond (NYSE: BEL) +35.20%

Luxury hotel operator seeks sale.

• Yelp (NYSE: YELP) +26.68%

Word-of-mouth platform beats on earnings.

• BlueLinx Holdings (NYSE: BXC) +19.23%

Building products distributor excels on earnings.

Thursday’s Big Decliners

• Maiden Holdings (NSDQ: MHLD) -41.33%

Reinsurer posts net quarterly loss.

• American Public Education (NSDQ: APEI) -21.35%

Analysts turn bearish on education services provider.

• Akebia Therapeutics (NSDQ: AKBA) -15.43%

Biotech posts net quarterly loss.

Letters to the Editor

“Is e-commerce booming in emerging markets, too?” — Linda S.

Yes and the tailwinds include rising middle classes; greater credit and debit card usage; the proliferation of group shopping sites; enhanced online security that reinforces consumer confidence; and an expanding pool of “e-tailers” that reach customers through their websites.

Questions about emerging market investing? Drop me a line: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.