S&P 500 Weekly Update: New Month, Same Secular Bull Market Trend
- There will always be challenges for investors to deal with. Balance your outlook with some of the positives.
- Understanding the market backdrop that we are dealing with goes a long way in determining your profitability.
- The Fed reiterates that it will be patient on rates. Investors should realize they will be out of the picture in 2019.
- Q1 earnings have been a pleasant surprise. The forecasts for 2019 may still be too low.
- Looking for more? I update all of my investing ideas and strategies to members of The Savvy Investor. Start your free trial today »
As long as a stock is acting right, and the market is right, do not be in a hurry to take profits.
The question that is being asked today by market participants. While the bull market is indeed back in gear with the break out to new highs, the question is whether it will stay.
A new month, the same trend. April is in the books and that is now four straight months of gains for the indices. The S&P and Nasdaq continued their streak of highs as both scored gains on Monday. The records continued for the S&P on Tuesday, then another new intraday high was met with a reversal as stocks met with weakness. That was quickly shaken off and the S&P closed flat for the week.
The tally shows the S&P up 17+% for the year. The average S&P 500 stock was up 3.54% in April and is up 18.46% year-to-date. The Nasdaq Composite joined the new high list while advancing for the sixth straight week and is now up 23% in 2019. The index is up 17 of the past 19 weeks.
Those lofty numbers spark caution and the talk of a pullback. The word on the street is the "risk is to the downside" and "the market is overvalued". Investors should try the following observation on for size. Guessing when a trend is going to end with a bullish backdrop in place, can be hazardous to your financial health.
Global equities traded in a sideways pattern after rallying 13% year to date. Chinese equities followed that same pattern with Chinese "A" Shares flat for the week. I view this as normal activity after the gains achieved this year.
Since the beginning of the Bull market there have been many theories and strategies bandied about from both the Bulls and the Bears. As you know, one theme that has been constant since the beginning of this bull market, blame everything on the Fed. Everyone knows the argument: The Fed has artificially pumped up the market.
I decided long ago I wasn’t going to play the blame game. I had my reasons. The idea was to watch all of the data and that included the price action. The S&P is up 220+% since quantitative easing was introduced in November 2008. The index is up 87+% since the breakout in March 2013 that launched the Secular Bull Market.
Now understand, if I was short or sat out this Bull market I would be blaming someone. The fact that I decided to BUY and continue to own equities during QE, the word blame in the context of the Fed is not in my vocabulary. Doesn't that make one wonder how the Fed obsessed were positioned since 2009? One of the primary reasons this bull market is most hated. The notion that this is "all about the Fed and the stock market can't be trusted" is still with us today.
I don’t see much sense in arguing over what has already occurred, but it seems many still have their outlook for the stock market today focused on the Federal Reserve. As you know quantitative tightening came along in 2018, and with it came the “Death Knell for the Bull Market” headlines.
The S&P reached another new all time high in October of 2018. The Q4 stock market debacle that followed emboldened the Fed obsessed crowd. They believed they were vindicated and correct in their theories. Not so fast.
The S&P is at new highs once again. QE ended in October 2014, and quantitative tightening is still in place. As one notable TV personality once said, “just the facts, Ma’am”. Perhaps there are other reasons for stock prices rising. Seems to me stock market highs have been achieved over the years without QE. For investors who have known nothing but a QE environment that seems to be an impossibility.
Despite a stall in 2015, corporate profits have risen nicely.
The last secular Bull market in the 1990’s was also a period where corporate profits rose dramatically.
Corporate profits to GDP since 1950 has averaged 6.6%. Corporate Profits as a Percentage of GDP is at levels that can be viewed as historically high, fluctuating between 9- 10% recently.
The investor that wishes to subscribe to the notion that it’s all about the Fed and it will all end badly, might also want to balance out that view by using other data. Others might say maybe the Fed theory has some merit, but it’s also all about Globalism as well. U.S. corporations are making plenty of money outside the U.S. these days.
At the end of the day, the tiebreaker is always price action.
Followers are well aware that it is best to use the price action over a longer period of time to forge a strategy. With indices at new highs, there is little argument over what really matters.
Of course if one wants to guess the stock market has made a decisive TOP here, they may want to ask themselves what separates this time from all of the other tops forged in the last 6 years? After all if an investor is going to go back into a shell at new highs, then they have been sitting in a cautious mode for most of the bull market. That is not the way to reap the highest rewards when you have the trend in your favor. The notion that everyone knows when to come out of that shell at precisely the right time, each and every time is fiction.
Here is a clue, it isn’t necessary to hunker down until we see decisive changes in the primary trend. Ironic how that strategy is always questioned over time, despite showing investors that it is key in managing their portfolios to achieve the greatest gains.
Scott Grannis shares his view of the economy stating the latest GDP print is better than anticipated but there isn't any boom just yet.
Good news, U.S. Households are still not re-leveraging.
Plenty of runway left before we start to see any issues.
The sugar high theory that says the the economic uptrend can't be sustained may be falling apart. Macroeconomic Advisers, a modeling firm, estimates productivity was up 2.3% in the first quarter from a year earlier. (Productivity came in at 3.6% this week). That is by far the largest increase since 2010, when the economy was bouncing back from recession, a time in the business cycle when productivity growth tends to be high. Between 2010 and 2017, productivity growth averaged just 1% a year.
Personal income rose 0.1% in in March after February's 0.2% gain and the -0.1% in January. Meanwhile, personal consumption expenditures increased 0.9% in March following the 0.1% February gain, after edging up 0.3% in January. Wages and salaries were up 0.4% in March versus February's 0.3%.
Consumer confidence bounce in April to 129.2 reversed most of the March drop to 124.1 from a solid 131.4 in February. Consumer confidence lies well above the 16-month low of 121.7 in January, but below the 3-month string of 18-year highs that ended with a 137.9 reading in October.
Q1 productivity grew at a hefty 3.6% pace, versus the 1.3% clip in Q4. The fastest rate in five years. Unit labor costs dropped to -0.9% versus the prior 2.5% rate. Output climbed 4.1% last quarter after a 2.6% Q4 rate.
U.S. factory orders bounced 1.9% in March, after falling 0.3% in February. It's the first monthly increase since December. The 2.7% surge in durable orders was nudged down to 2.6%.
IHS Markit final U.S. Manufacturing Purchasing Managers’ Index PMI posted 52.6, up slightly from March's recent low of 52.4. This signalled that the latest improvement in the health of the U.S. manufacturing sector was the second-slowest since June 2017.
Chris Williamson, Chief Business Economist at IHS Markit:
Although the PMI ticked higher in April, the survey remains consistent with manufacturing acting as a drag on the economy at the start of the second quarter, albeit with the rate of contraction easing. Historical comparisons indicate that the survey’s output gauge needs to rise above 53.5 to signal growth of factory production. As such, the data add to signs that the economy looks set to slow after the stronger than expected start to the year.
Employment growth also disappointed as hiring slipped to the lowest for nearly two years, albeit in part due to firms reporting difficulties finding staff amid the current tight labour market.
Markit services PMI was 53.0 in the final read, a little better than the 52.9 preliminary print, but is down from the 55.3 in March. It was at 54.6 a year ago, and this is the lowest reading since March 2017.
Chris Williamson, Chief Business Economist at IHS Markit:
The final PMI surveys for April indicate a marked slowing of the US economy at the start of the second quarter, suggesting the robust start to the year has lost some momentum. Businesses reported the weakest output and sales growth for two years, indicative of GDP growth slowing to 1.9% in April. “While the first quarter saw factory weakness being offset by a robust service sector, both manufacturing and services have now shifted into a lower gear.
An additional concern is that business optimism about the year ahead has slumped to its lowest since mid-2016, reflecting widespread reports from companies that weaker economic growth will likely further dampen business activity in coming months.
Texas factory activity continued to expand in April, according to business executives responding to the Dallas Fed Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, ticked up two points to 12.4, indicating output growth accelerated slightly from March.
Chicago PMI fell 6.1 points to 52.6 in April, down from 58.7 in March, the lowest level since January 2017.
ISM drop to a 30 month low of 52.8 more than reversed the March rise to 55.3 from a prior 2 year low of 54.2 in February. The drop bucks the stabilizing pattern for the component data in most sentiment surveys, leaving a weak start for Q2.
Construction spending fell 0.9% in March following some big downward revisions, leaving a 0.7% February gain and a 0.7% January increase. On a 12-month basis, spending posted a 0.8% y/y contraction rate.
The non-farm payroll report revealed a solid growth path for payrolls, with a 263k April gain after 16k in upward revisions that left a firm trajectory into Q2, with a firm growth path for both the goods and services component.
Pending home sales index rebounded 3.8% to 105.8 in March following February's 1.0% decline to 101.9. This is the highest index reading since July. The index ranged from 107.2 to 98.7 last year. That takes pending home sales to the fastest 3m/3m growth rate since 2015, suggesting a strong uptick in existing home sales activity is under way.
Lawrence Yun, NAR chief economist:
Pending home sales data has been exceptionally fluid over the past several months but predicted that numbers will begin to climb more consistently. We are seeing a positive sentiment from consumers about home buying, as mortgage applications have been steadily increasing and mortgage rates are extremely favorable.
The J.P.Morgan Global Manufacturing PMI, a composite index produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM, posted 50.3 in April, down from 50.5 in March, to register its lowest reading since June 2016. David Hensley, Director of Global Economic Coordination at J.P.Morgan:
The global manufacturing sector remained subdued at the start of the second quarter, with the PMI barely above the 50.0 mark and rates of expansion in output and new orders still lackluster and well below long-run trend levels. In particular, the capital goods sector PMI underscores that business capex remains stalled. International trade flows remain a significant drag on the manufacturing sector. New export business has now decreased for eighth successive months.
The IHS Markit Eurozone Manufacturing PMI recorded a level of 47.9, up only marginally on March’s near six-year low of 47.5.
Chris Williamson, Chief Business Economist at IHS Markit:
The manufacturing sector remained deep in decline at the start of the second quarter. Although the PMI rose for the first time in nine months, the April reading was the second-lowest seen over the past six years, signalling a deterioration of overall business conditions for a third successive month. The survey’s output index is indicative of factory production falling at a quarterly rate of approximately 1%, setting the scene for the goods producing sector to act as a major drag on the economy in the second quarter. The downturn remains the fiercest in Germany, with Italy and Austria also in decline and France stagnating. Spain’s expansion remains only modest.
The headline Caixin China Purchasing Managers’ Index, a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy, posted down from 50.8 in March to 50.2 in April.
Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group:
The Caixin China General Manufacturing Purchasing Managers’ Index eased to 50.2 in April, down from a recent high of 50.8 in the previous month, indicating a slowing expansion in the manufacturing sector.
1) The subindex for new orders fell slightly despite remaining in expansionary territory. The gauge for new export orders returned to contractionary territory, suggesting cooling overseas demand.
2) The output sub-index dropped. The employment sub-index returned to negative territory after hitting a 74-month high in March. According to data from the National Bureau of Statistics, the surveyed urban unemployment rate remained at a relatively high level despite edging down in March, suggesting that pressure on the job market remained.
3) While the sub-index for stocks of purchased items returned to contractionary territory, the measure for stocks of finished goods fell more markedly. The gauge for future output edged up, pointing to manufacturers’ desire to produce and stable product demand. The sub-index for suppliers’ delivery times rose further despite staying in negative territory, implying improvement in manufacturers’ capital turnover.
4) Both gauges for output charges and input costs edged down. There were only small changes in upward pressure on industrial product prices. We predict that April’s producer price index is likely to remain basically unchanged from the previous month.
In general, China’s economy showed good resilience in April, yet it stabilized on a weak foundation and is not coming to an upward turning point. The Politburo meeting signalled that in the first quarter of this year China had adjusted its countercyclical policy marginally. As pressure on the economy.
Nikkei India Manufacturing Purchasing Managers’ Index PMI declined from 52.6 in March to 51.8 in April. Pollyanna De Lima, Principal Economist at IHS Markit:
April PMI data signalled another slight improvement in the health of the Indian manufacturing economy, helped by ongoing growth of new order intakes. Although remaining inside expansion territory, growth continued to soften and the fact that employment increased at the weakest pace for over a year suggests that producers are hardly gearing up for a rebound.
When looking at reasons provided by surveyed companies for the slowdown, disruptions arising from the elections was a key theme. Also, firms seem to have adopted a wait-and-see approach on their plans until public policies become clearer upon the formation of a government. “With price pressures in the manufacturing economy cooling and growth losing momentum, it’s increasingly likely that the RBI may cut its official rate for a third successive time in June.
Nikkei ASEAN Manufacturing Purchasing Managers’ Index PMI rose from 50.3 in March to 50.4 in April.
David Owen, Economist at IHS Markit:
The ASEAN PMI notched up fractionally at the start of the second quarter, indicating another subdued expansion in the manufacturing sector. While output grew at a quicker rate, the rise was still weaker than those seen at the end of last year. Moreover, the increase was centred on Myanmar and Thailand, with all other countries seeing either softer growth or an overall decline.
That said, demand-side factors seemed to improve in April, most notably in foreign markets. New export orders rose for the first time since last July, albeit at only a fractional pace. This supported the quickest increase in total new orders for seven months, lending some optimism to manufacturers that have been noticeably affected by the ongoing trade war.
With discussions continuing between the US and China, firms will be hopeful that these will lead to reduced pressure from tariffs. Either way, markets in the region appear to be opening up at the start of the second quarter, which could hopefully fuel stronger growth in the months to come.
In a real head-scratcher, the Bank of England raised growth estimates, raised its estimate of how much growth would exceed potential, lowered inflation forecasts, and then argued it would need to keep hiking to ward off inflation pressure. Brexit worries?
IHS Markit Canada Manufacturing Purchasing Managers’ Index dropped from 50.5 in March to 49.7 in April, to signal a slight deterioration in overall business conditions.
Now that we have seen record highs in the market, earnings will have to continue to deliver. So far they haven't disappointed. The 1st quarter earnings season was forecast to show a 4% decline, and halfway through the season, earnings growth is flat to slightly negative. If earnings remain positive as the season winds down, that is a rather large miss in analysts forecasts. That may bode well for the remainder of the year. Forecasts may still be way too low.
FactSet Research weekly update:
For Q1 2019:
With 78% of the companies in the S&P 500 reporting actual results for the quarter, 76% of S&P 500 companies have reported a positive EPS surprise and 60% have reported a positive revenue surprise.
The blended earnings decline for the S&P 500 is -0.8%. If -0.8% is the actual decline for the quarter, it will mark the first year-over-year decline in earnings for the index since Q2 2016 (-3.2%).
Valuation: The forward 12-month P/E ratio for the S&P 500 is 16.8. This P/E ratio is above the 5-year average (16.4) and above the 10-year average (14.7).
The U.S. dollar has not yet broken out but is starting to trend stronger. This has always been an issue for some as they fear this is a potential catalyst that could weigh on earnings and risk sentiment especially for the multi-nationals.
However, when we step back and look at a the longer term view, the USD is at the same level it was in 2014. Another point that many may be discounting is the effect the new corporate tax rate is having on multinational companies. The playing field is now more level and possibly tilted to the U.S. as they can be a lot more competitive in the global markets at the new rate.
The Political Scene
Congress is back in session after being out of D.C. for two weeks. The first week of the recess saw "Medicare for All" dominate Wall Street thinking and keep pressure on the Healthcare sector. Last week, Healthcare as a whole seemed to recover with managed care recovering about 8%. The stock market has figured out the probability of that concept ever occurring.
The heat may be off Healthcare for a while as a White House meeting between Speaker Pelosi, Minority Leader Schumer, and President Trump on Infrastructure took place this week.
The WSJ reports, Democrats, Trump agree to aim for $2T infrastructure package. In comments surrounding talks with the president, House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer both praised the negotiations as productive and said they had agreed to return in three weeks to hear the president's ideas about how to pay for the measure. Schumer said:
There was goodwill in this meeting and that was different than some of the other meetings that we've had.
The Fed leaves rates unchanged. They maintain a policy on patience with rates. The initial market reaction was disappointment when they didn't hear the words "rate cut" from Chair Powell. Anyone looking for a rate cut now, need join the crowd that believed the Fed was going to raise rates in a softening economy. Both groups need to find a good money manager.
For now they don’t see any additional rate increases this year. Ladies and Gentlemen this is “nirvana” for the Fed. A solid economy, muted inflation, and rising productivity. Hence there is no urgency for the FOMC to act one way or another.
For those obsessed with the yield curve:
Source: U.S. Dept. Of The Treasury
The 2-10 spread started the year at 16 basis points; it stands at 21 basis points today.
As the S&P 500 has been making all-time highs in the past week, bullish sentiment as reported by the AAII Investor Sentiment Survey has risen back up to its highest levels since the start of April. The percentage of investors reporting an optimistic outlook rose to 39% from 33.5% last week. This is still only slightly above the historical average; so it is not at an alarming level. Alongside the solid increase in AAII's reading, Investors Intelligence sentiment readings are echoing the optimistic shift as the percentage reporting as bulls rose to its highest level since early October of last year.
The Weekly inventory report showed an increase of 9.9 million barrels. At 470.65 million barrels, U.S. crude oil inventories are at the five-year average for this time of year. Total motor gasoline inventories increased by 0.9 million barrels last week and are about 2% BELOW the five-year average for this time of year.
After posting a gain of 42% this year reaching levels ($66.30) not seen since last October, WTI has given some of that back recently. A bounce off the 200 day moving average kept the price above the $60 level. WTI closed at $61.86, down $0.97 for the week.
The Technical Picture
The amount of strength exhibited in this rally rarely disappears overnight. That doesn't necessarily mean higher prices from here, although that is a possible option. After these types of moves where new highs are set, choppy sideways action cannot be ruled out. In fact I give that the highest probability of occurring at some point. What the strength does imply. Pullbacks should be shallow and well contained.
Chart courtesy of FreeStockCharts.com.
On a closing basis, the 20 day moving average (green line) has held as support (2910). The index is simply following that upward trend line. Until we see that violated, there is little to discuss as far as downside support levels.
On the upside, it's always difficult to extrapolate how far a trend can go. Looking at the chart, an investor could have come up with a conclusion the trend was about to end a few times, and so far they would have been wrong.
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long Term view, the view 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.
Short term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should not be based on any short term view. These views contain a lot of noise, and will lead an investor into whipsaw action that tends to detract from overall performance.
The criticism and concerns over the performance of the Russell 2000 are a bit overblown. Many are citing the fact that while the S&P and Nasdaq have made new highs, the Russell remains about 8% from matching that feat. The stats reveal the index has kept pace with the S&P (+17%) and its year-to-date performance (+18%) ranks sixth-best in its history. The inability to break above old highs could well be because it’s domestic oriented with less exposed to the improving global growth story. Investors should also consider the heavy exposure to Health Care and Energy stocks as another issue the index has to contend with. Both sectors have been hit hard recently.
The index closed at its highest level since October of ‘18 on Friday.
Liz Ann Sonders posted this on Twitter last week:
Looks like there is a difference of opinion on the agenda being put forth by politicians and the media. While all may not be rosy, all may not be the horrible discord on inequality that is being presented.
Individual Stocks and Sectors
When the indices are at or near highs, an active investor has to be more nimble and selective in their activity. Money is moving around sectors now giving investors an abundance of opportunity. As an example, Financials were up 9% in April, catching that move correctly has paid off handsomely.
The selloff and the subsequent rebound in the healthcare sector was another opportunity that was laid at the feet of investors. Savvy investors watch the price action as their key to making these moves.
Of course passive long term investors just need to buckle up, enjoy the ride, and drown out the incessant noise from the market timers.
Far too many market analysts, pundits and some investors want to develop their view on what ends the Bull market. I have always viewed that as being odd. Then again, I can see why. That mindset often comes with fear. We are all fearful of losing money. In order to capture the lion's share of any bull market gains, one has to let some of that money go (on paper) along the way.
Another lesson in being able to cope with that issue just occurred in December 2018. At the end of the day, nothing was lost. As you know, that is easy to say now. However, I’ll remind everyone that very principle was being stated here while it was happening.
I revisited the Secular Bull market theme this week for a couple of reasons. The first, we are still in the middle of this trend. The second, the sea change with the pro growth approach to the economy looks to be slowly gaining momentum. That adds an important tailwind for market participants.
All secular Bull markets have plenty of things in common. There was record low unemployment, and improved corporate profits. Wage and productivity gains slowly added strength to the economic picture.
Inside of the expansion, there are waves of industrial, technological (5G, autonomous vehicles, robotics, etc.) and economic progress that make their way into employee’s wages, consumer’s pockets and corporate profits. That happens with a backdrop of solid economic growth. That solid growth has been lacking for a variety of reasons during this bull market. The shackles have been removed with a more competitive corporate tax structure as the first step. This is a global economy and corporations here in the U.S. are now on a level playing field.
What typically occurs next is a period of improving standards of living. Investors then experience a simple result. The stock market does well because market participants become willing to pay more for a dollar of earnings as the cycle progresses.
Multiple expansion, in the form of rising price-to-earnings ratios, drives returns even more than rising profits. The curse is that bull markets will get ahead of themselves with investors piling in, which pulls months of future returns into the present. This euphoric blow off ushers in the next bear market. It is that period where the excess that were built up over time are corrected. That, ladies and gentlemen, will end this bull market.
So while there will be corrections and drawdowns in our future, the evidence isn't here to suggest it is about to happen now. The Fed is on the sidelines, and it doesn't appear that global liquidity will be constrained. When the Fed does return to the investment scene, it just may be the result of a vastly improved economy. Despite what many believe, rising interest rates and rising stock prices in an improving economy are quite common during Bull markets.
The U.S. profits cycle may be once again be turning up again signaling the earnings swoon ends there. Money is now rotating from sector to sector with good breadth readings. Finally there is no evidence to suggest investors are giddy about investing in stocks.
Of course there are many that doubt the secular bull market theme. Let me remind all that these instances become clear in hindsight. While we are living and experiencing them, they are very challenging to perceive. At this point in time it is easy to say 1982 to 2000 was a Secular Bull market, but go back and read the commentary while it was happening. It was hardly definitive.
While many are still focused on the uncertainty, the market has been sending a signal that it is anticipating change. That change will more than likely bring more question marks and renewed uncertainty. That cycle has continued in that same fashion for the last 6 years as stock prices rose. Those that can identify what is transpiring under the surface of the market will continue to do well. Anyone that wishes to react before they do their research will continue to struggle. Stay the course.
I would also like to take a moment and remind all of the readers of an important issue. In these types of forums readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation. Please keep that in mind when forming your investment strategy.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of luck to all!
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