March 2019

March Madness

Today is the 10-year anniversary of the generational bottom for the S&P 500 (SPX) at 666.79. The index has rallied 308% to date according to Bloomberg, while the World Index has rallied 102%.

Stocks in January and February sprinted to their best 2-month start since 1991 after their worst December since 1931.

In 1991, we had emerged from a recession and the first Gulf War. The SPX was in the early stages of one of its longest and strongest bull runs that continued over the entire decade topping at SPX -1556 in early 2000.

In 1931, we were in the midst of the Great Depression and the stock market was down 43.8% that year.

The S&P 500 closed February up 11.8% year to date.

Recently, Q1 2019 earnings estimates have dropped by 6.5% to $37.60 from $40.21 according to FactSet. The stock market year-end drop, combined with a partially closed Federal government, had a negative effect. Weaker foreign economies also contributed.

This amounts to an above average earnings decline versus the past 20 quarters of -2.4%. However Q1 2016 saw an even worse earnings drop of 8.4%, after which the market went on to new all time highs.

Earnings rose 23% in 2018, yet stocks dropped 4.2%. Just reported, Q4 2018 earnings have posted a 13% gain and stocks are soaring.

Fear or greed determines investor sentiment, which sometimes drives prices too far in one direction or the other.

Trade wars and Fed policy both created uncertainty and have trumped earnings reports over the past 5 months.

After the latest run up, we are near resistance of 2800 on the SPX. The index is back to October 2018 price levels. Stocks drop like an elevator and rise more like an escalator.

Timing markets is clearly not easy as many factors come into play. As prices drop, investors typically stop buying, even though stock prices are getting cheaper.

Bond yields as expressed by 10-year US Treasuries have gone from 2.5% on January 3rd to 2.72% today. The Federal Reserve moved from a tightening stance in 2018 to a "patient" approach regarding further rates hikes as of January 4th. Perhaps they reacted to the stock market's 20% plunge from October - December?

Wages are rising for every level of employee, yet inflation is below 2%.

As the cycle ages, recession fears fester. An overheating economy does not yet appear to be in the cards for 2019.

According to the OECD, China is expected to grow GDP at 6.2%, the EU at just 1%, and the U.S. at 2.6%. Global economic output in 2019 is expected to increase by 3.3%, if trade does not slow materially due to tariff wars. Markets and investors anxiously await the outcomes of China-US, US-EU and Brexit-EU trade negotiations.

Tariffs are simply a tax on consumers, and if prolonged and intensified will eventually slow global economic activity. Stocks are cheap relative to bonds but earnings uncertainty is great and comparisons are getting more difficult.

After the recent “V” shaped plunge and market bounce, it is a good time to check your personal risk tolerance and investment goals.

If you found it hard to handle drops in your account balances, you likely have a lower tolerance for risk than you may have thought.

Disclaimer: These stock market observations are confidential and proprietary. They are for informational purposes only and are not intended to be used, and may not be used, as investment, legal, accounting, tax, or other advice. No express or implied representation or warranty is being made with respect to their accuracy or completeness. No obligation exists to inform the recipient when the information herein is no longer current or accurate. These observations do not constitute an offer to sell or a solicitation of an offer to buy any securities or interests in any investment vehicles managed by CFA or an associated person or entity, or to provide investment advisory services.