Here Come New Highs For U.S. Stocks

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by: Ivan Martchev

On October 31, 2018 the S&P 500 Index closed at 2711.74. On November 30, 2018 the index closed at 2760.17. That’s appreciation of 48.43 points or +1.79%. What is the average performance of the S&P 500 for the month of November since 1950 according to the Stock Trader's Almanac? 1.50% (see chart below)

Standard and Poor

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Now, I know October this year was bad, driven by the triple whammy of Fed jawboning, President Trump’s trade war rhetoric, and divisive midterm election rhetoric. Still, November saw the election come and go with an “as-expected” outcome. The Fed dialed back its hawkish rhetoric and Trump delivered a truce in Buenos Aires with the Chinese trade negotiation team for a 90-day “stay of implementation” of the 25% tariffs on $200 billion of Chinese goods while they hammer out their differences.

Is it conceivable that the S&P 500 may flip into overdrive and make up all the losses it suffered in October? Yes, it sure is, and the chances of hitting an all-time high by December 31 are not insignificant, as that would mean an appreciation of just over 170 S&P 500 points. I would rate those chances at better than even, and if we don't see an all-time high in December, we are likely to see it in January 2019.

United States Two Year Note Yield versus United States Ten Year Government Bond Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Empirical evidence from the more professional (and less manic) bond trading world says that the Fed is backing off. In the Treasury market, the 2- and 10-year note Treasury yields declined in November. The 10-year rate finished at 3.01% while the 2-year finished at 2.81% for a grand total of just 20 basis points (bps) difference. Bond yield declining into an expected December Fed rate hike is a sign that the market believes that the Fed is likely to be less aggressive in 2019.

Yield Curve Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

While the difference between the 2- and 10-year notes has not reached zero yet, it will likely invert at some point in 2019, meaning that one should look for a recession in the year 2020. Keep in mind that the all-time highs for the S&P 500 in the prior two cases (in the years 2000 and 2007) came after an inverted yield curve in both cases. This doesn't mean we should follow this same pattern, but it does offer the opportunity that we may yet see the S&P 500 top 3000, particularly if The Donald delivers his victory lap upon a successful Chinese trade deal, which I would view as a major Presidential accomplishment.

2019 Outlook and Beyond

Even with a Chinese trade deal, a dealmaker like Donald Trump cannot eliminate the economic cycle in the United States – or in China, for that matter. The longest economic expansion in the history of the U.S. is 10 years (March 1991-March 2001). It looks likely we will beat that record, as the present economic expansion will become the longest in history as of July 2019. It also looks like there is likely to be a recession before President Trump’s first term ends in January 2021. Dare I say that with a Chinese trade deal under his belt and a denuclearized North Korean peninsula, he has a legitimate claim to run for a second term? Stranger things have happened, like him winning the Presidential election in 2016! That would make the completion of the Mueller investigation a momentous event as the smoke being seen coming from the Special Counsel's office is right now consistent with the size of a California wildfire.

One can say that Season 1 of The Presidential Apprentice was erratic, Season 2 was dramatic but more orderly, but next year’s Season 3 promises to be melodramatic with a Special Counsel’s report ready to be delivered to Congress, which has now flipped Democratic. It is only natural that one should expect political melodrama with such a cast of characters.

Market Declines Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As to what the stock market might do in a 2019 melodramatic scenario, it is too early to speculate, but suffice it to say that it would depend on the ability of the Federal Reserve to deliver a soft landing for the economy. (It has to be noted that a recession in 2020 or 2021 does not mean a repetition of 2008.)

In the past 100 years there have been only three stock market declines of over 50% – 1929, 1974, and 2008. In all three cases, there was something much bigger than a recession plaguing the stock market. The oil price shock of 1974 was an external event, while 1929 and 2008 were caused by a lot of financial leverage that topped out, culminating in the Great Depression (1930s) and the Great Recession (2008-09).

In the past century, there have been quite a few recessions that did not cause bad bear markets for stocks. Given that the financial system is currently on better footing than it was in 2008 or 1929, the odds are that the next recession would be more normal and not the 1929 or 2008 kind.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

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