The balance of the macro data remains positive. A recession starting in 2019 is unlikely, but, for the first time, a recession in 2020 is a rising possibility.
Analysts' expectations for 10% earnings growth in 2019 have been revised down to just 2%. This estimate will be about right if margins can be maintained at the current level and the dollar doesn't further appreciate. For 2020, analysts currently expect growth of 5% to sales and 11% to earnings. This is too optimistic.
In July, the Consumer Confidence Index (CCI) jumped to its highest level since last September, right before stocks started a 20% correction. Sometimes a high in the CCI coincides closely with a 5% or greater fall in stocks, but at other times the lag has been many months. In general, however, the risk/reward for investors over the next 6 months has not be favorable.
The 25bp rate cut by the FOMC this week was warranted given ongoing weakness in housing, but the balance of the macro data remains positive, meaning a recession starting in 2019 is unlikely.
The FOMC is likely to lower its guidance rate tomorrow. When the economy is expanding and stocks are near their highs (like now), this has been a net positive for equities.
A small "insurance" rate cut by the FOMC later this month appears warranted given ongoing weakness in housing, but the balance of the macro data remains positive, meaning a recession starting in 2019 is unlikely.
The main stock indices in the US are near their ATHs. The small cap index is the exception. Their underperformance has most often marked a low in SPX, not a high. Investors should be more worried when small caps lead, as this has most often been a feature of major bull market tops, the reverse of the situation we have now.
Fund flows out of equities and into bonds is the most extreme in 15 years. Retail investor bearishness is consistent with that at Christmas, early 2016 and other durable lows in equities. Fund managers surveyed by BAML have the highest cash allocation in 16 years and the lowest equity allocation since the 2009 bear market bottom.
The cumulative advance-decline (A-D) line for both the NYSE and SPX made a new all-time high (ATH) last week. That's good news for stocks, as they most often move higher in the following weeks/months, also to new highs.
It's been a noisy few months for macro. The prolonged government shutdown in December significantly delayed many data reports.
The Fed may soon cut rates and that prospect is making investors nervous. Is the start of easing necessarily bad for equities? In short, probably not, at least not immediately. There's more to it than that.
For the remainder of 2019, the evidence still leans bullish. That’s not a guarantee. This time could be different because the US is engaged in a seemingly unending trade war with two major trading partners. All the market technicals, sentiment and fundamental data available cannot predict what happens next.
Sales and earnings growth were 6% and 8%, respectively, in 1Q19. Margins rebounded from the end of 2018 but are still below the cycle high made in 3Q18. Looking ahead, analysts' expectations for 10% earnings growth in 2019 have been revised down to 3%. The key for share price appreciation in 2019 is likely to hinge almost entirely on valuations expanding.
Although fund managers are less bearish than they were at the start of 2019, they are far from being bullish. They are overweight cash. Their global equity allocations are almost a standard deviation below the mean. Their bond allocations are at a 7-year high.
Strong starts to the year and multi-month gains have a very high propensity to lead to further equity gains in the months ahead and by year end. There are precedents for the indices to top now, but those are the exception. But it would be a mistake to assume the indices will just sail higher in the remainder of the year.
Retail sales fell into contraction in December. Employment in February was the lowest since 2010. November new home sales growth dropped 14%. It was an ugly winter for macro data, but that weakness now looks anomalous: the data from the past month mostly point to positive growth. A recession starting in 2019 looks unlikely.
NDX is now at a new all-time high (ATH). Leadership by NDX is a positive for SPX: historically, the risk/reward over the coming weeks and months for SPX has been excellent. Volatility has been unusually low so far this year. That's unlikely to last.
This has been one of the 10 best ever starts to a year; over the past 60 years, similar fast starts have consistently led to continued gains in the months ahead.
NDX, RUT and DJIA have all risen 9 weeks in a row. Long win streaks like these have a very strong propensity to continue higher, although an interim period of consolidation and retracement is frequent. Years that start as strongly as 2019 have almost always added sizable gains the rest of the year.
Corporate results in the fourth quarter of 2018 were good, but not great: sales grew 6% and earnings rose 32%, but profit margins fell hard. Expectations for 10% earnings growth in 2019 have already been revised down to 5%. This still looks too optimistic...
SPX is now back to within 1% of the top of its trading range from October to early December. It would be very surprising if SPX did not encounter some resistance as it nears 2790-2810.
Fund managers came into 2018 very bullish, with cash levels at 4-year lows and allocations to global equities at 3-year highs. Global equities ended the year 15% lower.
SPX has now gained 16% since Christmas Eve, while the Nasdaq is up 19%. NDX, RUT and DJIA have all risen 7 weeks in a row. Large, uncorrected gains like these are typically near the outer limit before a period of consolidation/retracement.
SPX has now gained 13% since Christmas Eve, while the Nasdaq is up 16%. After the recent plunge, it would be normal for the indices to give up most of their gains and retest the lows again. That's been a consistent pattern over the past 40 years.
What is notable about the 10% rally since Christmas Eve time is the persistence of the gains each week, and the exceptional breadth (participation) that has driven the indices higher. This is important because, in the past 70 years, this has never taken place within the context of a bear market.
Equities fell 20% from their September high into Christmas Eve. Since then, they have rallied almost 8%. While this is encouraging, there were two similar rallies, at the start of November and December, that both fizzled out. What is different this time?
The data from the past month continues to mostly point to positive growth: employment, wages, consumption and manufacturing are all trending higher. But there is a very important exception: weakness in housing is apparent. If this persists and other measures, especially employment, start to also weaken, a recession in 2019 is possible.
SPX had formed a topping pattern in August, and events since then have only strengthened this pattern. But there is little evidence of the underlying stress that is normally associated with big problems. This is not a market trying to efficiently discount next year's growth; it's a market mostly driven by fear and emotion.
The macro economic story is starting to change. The data from the past month continues to mostly point to positive growth, but there is a very important exception: weakness in housing is apparent. If this persists and other measures, especially employment, start to also weaken, a recession in 2019 is possible.
Corporate results in the third quarter were excellent. Looking ahead, expectations for 10% earnings growth in 2019 looks far too optimistic and will likely be revised downward as the substantial jump in margins this year is unlikely to continue. Earnings are at risk of falling.
Fund managers are still overweight global equities, especially US equities. But in most other respects, managers are very bearish, having multi-year low profit and economic growth expectations. A third believe the S&P has already peaked. Their cash allocations are high.
The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.
With SPX closing below its 10-month moving average, a sell signal for a popular trend following system triggered today. This system has handily beaten the long-term performance of just holding SPX. So what happens next?
US equities are down 10% from their all-time highs just 5 weeks ago. The trend in equities has turned bearish, and that is not something that should be taken lightly. The evidence pointing to a major top being formed has further increased.
Equities fell 4-5% last week and have given up most of their 2018 gains so far in October. This might feel like the start of a bear market, but that is the least likely outcome.
After being out of favor for 17 months, fund managers are now overweight US equities by the most since January 2015. It's at an extreme, and the US should underperform.
The longer term trend is positive but the near-term outlook is unfavorable. It seems unlikely that any equity weakness will be substantial or long lived, but investors should remain on alert to heightened risk over the next several weeks. We believe that will be a good set up for gains into year end.
The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.
SPX, NDX, small caps as well as broad measures like the Russell 3000 - which equals 98% of total US market capitalization - made new all-time highs (ATHs) last week. The trend is clearly higher, and several new momentum studies suggest that equities are likely to gain more before year-end.
US equities have returned to their January all-time highs. Several new momentum studies suggest that equities are likely to gain more into year-end. Despite the gains over the past 5 months, investor sentiment is not frothy. US equities now have a topping pattern in place: the momentum high in January has been followed a price high in August.
Corporate results in the second quarter were excellent. S&P sales grew 11%, earnings rose 27% and profit margins expanded to a new all-time high of 11.4%. Fundamentals are driving the stock market higher, not valuations: earnings during the past 1 year and 2 years have risen faster than the S&P index itself. The strong growth in company profits is not due to the net reduction in shares through, for example, corporate buybacks.
The 5 largest stocks are big (but not unusually so) and outperforming most other stocks (which is how they came to be in the top 5). All of this is normal. Over time, stock indices have typically been driven higher by a small number of stocks. And over time, those leaders have continually changed.
US equities have gained every month since April, and are up over 3% so far in July. Our long term view remains that SPX will make a new all-time high in the months ahead. The short term is less clear.
Emerging markets equities have lagged in 2018 and throughout most of the last decade. Recent fund outflows have been extreme. Fund managers are underweight the region. Their currencies and commodities are not liked. The region is now "cheap" and it might be ready to outperform.
When thinking about the last 20 years, investors easily recall the tech bubble, the financial crisis and the flash crash in 2010 that together form the most recent lost decade for equities. These negative events dominate our decision making. The (more important) 300% return from equities during this time does not.
US equities are up three months in a row and positive for the year. Historically, equities have a very strong propensity to end the year higher under these circumstances. That remains our long term view. Shorter-term, the S&P remains in a 5 month consolidation/trading range.
Debt is a perennial worry, but much what you hear about debt in the US is hyperbole. Here are the facts. Household debt has fallen in the aftermath of the Great Recession and debt relative to net worth is as low now as in 1985. Corporate leverage today is not materially different than it was in 1993 or 2003, i.e., early in two expansion cycles.
US equities are up two months in a row and positive for the year. They are outperforming the rest of the world, despite ongoing Quantitative Tightening here and QE abroad. In the past few days, the Nasdaq has joined the small cap indices at new all-time highs.
