Are risks growing or will the bull market continue? We believe the answer to both is yes. Political bumbling, monetary policy shifts, and geopolitical tensions have all escalated, but the bull continues to power ahead, largely unscathed by the tumult that surrounds it.
The environment for U.S. and global stocks continues to be in decent shape, but some risks are elevated and the possibility of a pullback exists. A notable potential driver of bouts of volatility could be U.S. and global central bank policy as they sail toward monetary policy normalization.
We say goodbye to the first half of a tumultuous, but rewarding, year and look ahead to the second half to see what might be in store for the U.S. economy and stock market.
A bit of volatility returned to Wall Street, with indexes pulling back from record highs and the leading sector performer to this point in the year, technology, experiencing a decent-sized pullback. Meanwhile, we've seen a flattening of the yield curve, which suggests the bond and stock markets may be sending conflicting economic signals.
Tech "wreck?" That's a bit of a stretch in my opinion; but the financial media loves a good headline. The major ascent—and recent pullback—of the so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) has generated much attention; and lately, the subject of technology stocks more broadly has dominated Q&A sessions at events at which I've spoken.
Goldilocks appears to be taking up residence on Wall Street, with modest growth, low inflation and a cautious Fed combining to make things "just right" for investors. Additionally, the apparent improving global trade trend could help contribute to further stock market gains and support large-cap outperformance. But the risk of a pullback and/or sharp acceleration in volatility is elevated courtesy of both domestic and world political uncertainty, and the potential of a Fed misstep.
The pace of job growth has slowed, but it’s likely not because the economy is weakening. It may even be because the economy is strengthening.
Both political uncertainty and Fed policy changes could contribute to increased volatility, but solid economic and earnings growth—both in the United States and globally—should help the bull market to continue. We suggest looking past the political rhetoric for the most part and focusing on economic developments and the long-term stability the United States provides. Globally, we’re seeing improving growth, but China is a concern that bears watching and emphasizes the need for a globally diversified portfolio.
"Three steps and a stumble" was first illustrated by Edson Gould, the legendary market technician from the 1930s through the 1970s. Ultimately the baton was passed from Gould to another legendary market analyst (and my mentor/boss for my first 13 years in this business), Marty Zweig, who incorporated the "rule" into his monetary policy indicator.
Subscribing to the "sell in May" theory has not always been financially rewarding, so be cautious about trying to trade around any likely volatility. The U.S. economy is growing, but not too fast, earnings have accelerated sharply, and fiscal tailwinds are still blowing. There is the potential for a retrenchment in the gains in emerging market stocks in the near term, but sticking with a diversified portfolio is important. Pullbacks are possible but stay focused on fundamentals and your long-term goals.
Much ink has been spilled lately by the financial press on the dramatic move down in market volatility as measured by the CBOE Volatility Index (VIX), to the lowest level since February 2007.
Recent market action has all the markings of a relief rally. The French vote in favor of centrist candidate Macron took "Frexit" off the table for now; a new tax cut proposal by the Trump administration, and the decreasing likelihood of a near-term U.S. government shutdown all appeared to play a part in the sharp rise in stocks and plunge in volatility.
As I've often noted when it comes to the relationship between economic data and the stock market, "better or worse tends to matter more than good or bad." In other words, stocks tend to key off rate of change more than level when it comes to economic indicators.
Investors appear to be taking another look at the risks they are willing to take, while also considering whether the reflation story may not develop as hoped. Reflation is the process of getting economic growth and price broadly back to pre-recession levels. While progress has been made, growth is still not accelerating.
Trumponomics, the Trump Trade, the Trump Rally—and more recently Trumpocalypse—you've heard them all. Now you'll read a story (and perhaps hum a tune) about economic inflection points and a stronger stock market which may have had little to do with the results of the election.
After a party is over, and the host turns on the lights, the picture often looks quite different than it did just a few minutes before. The realities of the U.S. political process are being recognized and the "hard" economic data is not yet living up to the "soft" (confidence/survey-based) data.
Much ink has been spilled by Wall Street analysts, the media, and yours truly, about the historically-wide spread between the so-called "soft" and "hard" economic data. Before getting to my latest thoughts on the subject, some definitions are in order.
Nothing seems to be able to phase the stock market recently. Political infighting, Presidential tweets, North Korean missile launches, oil falling below $50, European political uncertainty, higher bond yields, and the Fed raising rates: none of those forces have knocked stocks off their recent uptrend.
Many investors are wondering whether the stock market has come too far too fast. The latest consolidation brought the S&P 500 down only 2%, but the average stock was down more than that.
The stock market's rally resumed following the President's comments on tax reform and investor optimism continues to rise. There are solid economic supports for the market's surge, but gains may have gotten a bit ahead of themselves and a pullback should be expected at some point. As lovely as "melt-ups" feel while they're happening, a healthier pattern for stocks is to consolidate gains after significant rallies. Fundamentally, earnings have been solid, supporting the rally, but there are risks there as well as doubt about the "stickiness" of pricing power increases. Stay patient, diversified, and remember the power of rebalancing. We believe this secular bull market still has legs, but discipline is essential.
One of the key themes I and my strategy colleagues highlighted in our 2017 outlook was the regime change from monetary policy being the only game in town to fiscal policy taking at least one of the reins.
Much ink spilled these days—including by yours truly—tends to be of the macro variety. This is for good reason as studies have shown that macro forces have been greater determinants of asset class performance than traditional underlying fundamentals.
Since the Dow finally breached the 20k mark, equities have been largely range-bound. The enthusiasm seen in measures of investor sentiment following the election of Donald Trump has waned a bit as the realities of policy priorities—and getting things done in Washington—begin to set in.
In a unanimous vote, the Federal Open Market Committee (FOMC) left interest rates unchanged at its two-day meeting which concluded today; however the statement noted rising confidence among business leaders and consumer in the period since the election.
The Dow's flirtation with 20k went on for weeks, with the financial networks breathlessly reporting on every tick as it approached the milestone—subjecting them to much lighthearted ridicule on Twitter and the like.
The world is changing for investors but we believe it's largely in a positive way, although there will be bumps along the way. The recent sideways equity movement was a healthy consolidation of the post-election gains, and we suggest investors add to U.S. equity positions as needed at the expense of some developed market international exposure. Inflation is ticking higher, and the Fed is becoming more hawkish, but the conditions supporting those moves are also positive supports for stock.
U.S. stocks have been consolidating gains seen in the aftermath of the November presidential election, a healthy process following such strong gains. Further appreciation should be supported by improving U.S. and global economic and earnings growth. Disappointments are likely on the U.S. policy front but we would view those as buying opportunities for now.
In conjunction with the publishing of a summary of Schwab's 2017 outlook across asset classes; this report is a more detailed summary of my 2017 outlook, with a dash of rear-view mirror analysis of the year just ended. Each of the broad topics discussed below will be further unpacked over the next couple of months in individual reports.
The Federal Reserve surprised no one today and the vote was unanimous. The Federal Open Market Committee (FOMC) raised the federal funds rate by 25 basis points—to a range of 0.50-0.75%—for the first time this year; having raised rates initially a year ago at this same time.
November turned out to be an excellent month for the major U.S. stock indexes, with all three, plus the Russell 2000 index of small caps, hitting record highs.
The stock market has had an excited run since the presidential election, with heightened optimism for growth looking ahead into 2017. Not to rain on the optimists’ parade, but there was actually ample evidence of improving growth before the election.
Since the pre-election low on November 4, the S&P 500 is up 4.7%, while the Russell 2000 (small caps) is up a whopping 13.8%—rallies which have confounded many investors given the pre-election consensus that stocks would fall on the uncertainty associated with a Trump victory.
The election is over but some uncertainty remains, which means bouts of volatility are likely to persist. The Fed is likely to hike rates in December but uncertainty about the path of rates in 2017 will persist. Additional uncertainty may come from elections around the world, with the potential for a continuation of surprising outcomes that could rattle markets at times.
Donald Trump has pulled off an astonishing upset to win the White House, securing at least 288 electoral votes as of 3:30 a.m. EST to defeat Hillary Clinton.
Our view, expressed over the past month, was that a surprise win by Donald Trump would likely be one of the most unsettling outcomes for the markets. Indeed, that has come to fruition.
Given election-related distractions this week, today’s report will be chart-heavy and word-light; but on an important topic. Last Friday’s jobs report garnered much attention given its proximity to the next Federal Reserve meeting.
Stay calm and carry on. We believe U.S. earnings and economic growth will continue to support an ongoing bull market, but gains will likely be modest and pullbacks should be expected alongside political and monetary policy uncertainty. Globally, wage growth is picking up, but that doesn’t have to mean bad news for profits.
A burgeoning topic of conversation during Q&A sessions at my recent client events has been elevating healthcare costs and their impact on the consumer and the economy.
U.S. equity indexes have made little headway over the past few months, but flat is relatively impressive given the obstacles of Fed and election uncertainty, some softer economic data, downgrades in earnings, and valuation concerns.
Over a weekend when I thought, “there are no words…” so often, this report will have few words, but a lot of charts and tables. Speaking of the election, it’s been remarkable that, given the ample deficits of both presidential candidates, rarely do either discuss the country’s deficits or debt.
