Big First Quarter Gains Undoubtedly Bullish Well the big gains of Q1 are in the books and after the nastiness in Q4 it’s reassuring to see the “Sweet Spot” of the 4-Year Presidential Election Cycle returning to form and delivering solid gains. The Sweet Spot of the 4-Year Cycle runs from Q4 of the Midterm Election Year through Q2 of the Pre-Election Year for with an average gain of 21.1% for the S&P 500 over the 3-quarter span. The S&P 500 gained 13.1% in 2019 Q1, but it lost 14.0% in 2018 Q4 and is still down -2.7% for the Sweet Spot so far. But, nevertheless, this type of gain for the S&P 500 in Q1 is undoubtedly bullish. The S&P 500’s gain for 2019 Q1 is the 26th best quarterly gain for the index since 1930, 7thbest Q1 since 1949, largest Q1 gain since 1998 and the top quarterly gain since September 2009. As illustrated in the accompanying table the 44 prior times that the S&P 500 was positive in Q1 since 1949 resulted in 40 full-year gains and 4 losses for an average gain of 16.2% and gains for the remaining 9 months of the year 38 times out of 44 year with an average gain of 8.6%. The 18 years with Q1 gains between 5.5% and 13.9% are all followed by full-year gains with the only blemish in geopolitically charged 1956. The big black mark came from Black Monday 1987. 1956 was mired by the Hungarian Revolution and the Soviet invasion as well as the Suez Crisis, the Second Arab-Israeli War. 2011 was hindered by the international sovereign debt crisis, the U.S. debt-ceiling crisis and the resulting downgrade of U.S. credit rating. The dotcom bubble popped in the year 2000. Tepid growth and earnings declines created a mini bear in 2015 that bottomed in February 2016. And finally, the 1980-1982 double-dip recessions put U.S. stocks in abear market throughout 1981 that ended in August 1982.
A Solid Encore to a Strong Quarter The first quarter returns for the S&P 500 were quite strong, but if you thought the market wouldn't have enough energy for a good encore, the first full week of Q2 proved otherwise. With gains on every trading day of the quarter's first week, the S&P 500 heads into Monday riding a seven-day winning streak and the first five-day winning streak to kick off a quarter since the beginning of 2018. Before that, though, you had to go all the way back to 2010 to find another quarter where the S&P 500 kicked off the quarter with a five-day winning streak. The table below shows every quarter in the post-WWII periods where the S&P 500 was up in the first five trading days of a quarter. For each period we show the date of the S&P 500's fifth trading day for that quarter, how long the winning streak was as of that date, and then how the S&P 500 performed over the following day, week, month, and quarter. While one would think that a strong 'first impression' for the quarter would lead to solid gains going forward, the results don't back that up. in the 26 prior periods shown, the S&P 500 actually saw an average decline of 0.12% on the sixth trading day of the quarter with gains less than half of the time. One week later, the S&P 500 saw an average gain of just 0.05% (median: 0.23%) with positive returns just under 58% of the time. Moving out three months, the S&P 500's average and median return are both over 1.3%, but here again, the S&P 500 was only up less than 60% of the time. That's hardly anything to get excited about, although the one silver lining is that more recently, the S&P 500's average return is considerably better. In the last thirty years, the S&P 500 has seen positive returns over the next three months in eight out of eleven periods for an average gain of 3.2%.
The December Low Indicator Has Bulls Smiling After the best first quarter for the S&P 500 Index since 1998, the big question is: What happens next? The December Low Indicator was created in the 1970s by Lucien Hooper, a former Forbes columnist and Wall Street analyst. Simply put, the indicator says that if the S&P 500 closes beneath the December low during the first quarter, it’s a warning sign for potential weakness over the balance of the year. The flipside is if it doesn’t, good times could be coming. Given the S&P 500 just went all of the first quarter without closing beneath the December 24 low, it’s worth taking a deeper dive. Sure enough, there appears to be some truth to this concept. “The December low indicator seems quite simple, but it has a tremendous track record,” explained LPL Senior Market Strategist Ryan Detrick. “When the S&P 500 stays above the December lows throughout the first quarter, the full year has been higher an incredible 34 out of the last 34 times, which bodes well for 2019.” In fact, this warning even worked last year, as it triggered in the first quarter of 2018 and eventually played out during the big fourth quarter sell-off. As our LPL Chart of the Day shows, when the S&P 500 stays above the December lows in the first quarter, the full year does quite well.
Typical April Trading: Mid-Month Surge Stronger Second Half Over the recent 21 years April is the top-ranked month for DJIA. April ranks #3 S&P 500, #5 for NASDAQ, #2 for Russell 1000 and #4 for Russell 2000. Average gains over the period range from a low of 1.19% by NASDAQ to a respectable 2.29% by DJIA. The first half of April used to outperform the second half, but since 1994 that has no longer been the case. In fact the second half of April is stronger over the recent 21-year period. Early April trading is usually positive for the first 4 days then flattens off until mid-month. Then the market tends to surge from the tenth to the fifteenth trading days. DJIA tends to close out the month strongest with NASDAQ closing weakest. Except for DJIA weighed down by Boeing (BA), stocks are having an above average month so far, which is quite typical in Pre-Election years where April has tended to be even stronger.
April’s Option Expiration Week Historically Bullish: DJIA Up 30 of Last 37 April option expiration is generally bullish across the board with solid gains on the last day of the week, the entire week and the week after. Since 1982, DJIA and S&P 500 have both advanced 23 times in 37 years on expiration day with an average gain right around 0.15%. Expiration day used to be stronger, but four or five straight years of declines has taken on a toll on the longer-term record. Nonetheless, expiration week has a bullish track record over the past 37 years even factoring in recent weakness on the last day. Average weekly gains are 1% or better for S&P 500, DJIA and NASDAQ. The bullish bias of April expiration also persists during the week after. DJIA has posted a full-week gain in 15 of the last 20 weeks following expiration.
Initial Jobless Claims Keeps Killing It Thu, Apr 18, 2019 Just when you thought last week's Initial Jobless Claims couldn't get much better, this week's release smashed estimates once again! Seasonally adjusted initial claims came in at the lowest reading since September of 1969 at 192K, well below estimates of 205K. That is the third week in a row where claims have come in below forecasts by at least 10K. That is something that has only happened two other times in the past decade; once in 2009 and again in 2014. Whereas this is the second straight week of sub-200K readings, it is also the 80th straight week of readings at or below 250K (the second best streak on record) and 215th below 300K (a record streak). Continuing Claims are mirroring strong initial claims coming in at their strongest level since October of last year. The four-week moving average has continued to fall coming in at 201.25K this week versus last week's 207.25K. Both this week and last were new 52-week lows and lows for the cycle. That is something we have not seen since last September when we saw four weeks of 52-week lows in a row beginning on August 31st. This week's number is also the lowest the moving average has been since 1969. Given these new lows, jobless claims data looks very strong and the prior highs seen earlier this year can more confidently be called a blip rather than a new trend. Turning to the non-seasonally adjusted data, claims fell by just over 1K down to 195.4K. This decline was to a much smaller degree than previous years for the current week of the year but is still the lowest for the current week of the year since 1969.
Digging Out of a Soft Patch Leading data released recently have confirmed the U.S. economy could be digging out of its soft patch. As shown in the LPL Chart of the Day, the Conference Board’s Leading Economic Index (LEI) increased 3.1% year over year in March. Year-over-year LEI growth accelerated, breaking a five-month streak of slowing that coincided with disappointing signs in other economic data. The LEI, which is composed of 10 leading indicators, is one of our favorite gauges to watch because of its prescient track record. The index has fallen negative year over year before all nine recessions since 1955. Even though LEI growth has slowed recently, its long-term change remains squarely in positive territory. “We’re seeing some signs of growth break through as global headwinds subside,” said LPL Chief Investment Strategist John Lynch. “Even though coincident data have slumped recently, leading indicators point to an economic rebound.” Initial jobless claims fell to 192K, declining to a cycle low for three straight weeks for the first time since 2009. While most labor-market data serve as lagging indicators of U.S. economic health, jobless claims are a leading indicator. Historically, a 75–100K increase in claims over a 26-week period has been associated with a recession. Retail sales rose 1.6% in March, the biggest monthly gain since September 2017. Retail sales’ impressive gain last month could have directly benefitted first-quarter gross domestic product (GDP), as consumer spending constitutes about 70% of GDP. At the very least, improving consumer data show individuals feel more empowered about the economic outlook compared to a few months ago. On Friday, we’ll get more details on just how soft the U.S. economy’s soft patch was in the first quarter. Economists surveyed by Bloomberg estimate GDP grew 1.6%, while regional Fed bank models forecast growth from 1.4% to 2.8%.
Next Bump in Pre-Election Year Rally Could Arise in May As of today’s close, DJIA is up 13.6% year-to-date as of today’s close. S&P 500 is up 16.0% and NASDAQ is at 20.8%. Compared to average pre-election year historical performance since 1950 graphed in the charts below, DJIA, S&P 500 and NASDAQ are all still comfortably above past pre-election year average performance for this point of the year. Aside from a brief excursion on the second trading day of the year, 2019 has largely tracked pre-election year historical performance and then some. Should this trend continue, then the next area of concern is just after mid-May. This is also right around the time Q1 earnings season is beginning to wrap and focus shifts to Q2 estimates. However, should late May weakness materialize, it could prove to be a fair entry point as the market usually rallies through June to mid-July.
The Waiting Game for Record Highs The wait is over. After more than seven months, the S&P 500 Index notched a fresh all-time closing high of 2,933.68 on April 23. To get here, investors have weathered back-and-forth in trade negotiations, a historic government shutdown, unrelenting Brexit headlines, the Federal Reserve’s (Fed) U-turn in policy, and signs of a global slowdown. Fortunately, U.S. stocks have powered through record highs after a prolonged dry spell. As shown in the LPL Chart of the Day, the S&P 500 has climbed an average of 12.9% in the 12 months after snapping at least 6-month long record high drought, based on data since 1950. “It has been a long time since the S&P 500 scored a new high, yet this could actually hint at future gains,” said LPL Research Senior Market Strategist Ryan Detrick. “The waiting game for record highs may be tough, but it has proven the durability of this bull market based on sound fundamentals.” Stocks’ rapid rebound this year has been impressive, especially 10 years into the current bull market. The S&P 500 has rallied more than 20% from the December lows amid the Fed’s pause in rate hikes, progress in trade talks, and an uptick in economic data after a soft beginning to 2019. Historically, when U.S. stocks have gone six months without a record, investors have had to contend with a significantly longer waiting period (and more market volatility). The benchmark has taken an average of 25 months to post new highs in times it hasn’t hit a record within six months. We’ve maintained that the late-2018 sell-off was overdone, and we see a compelling case for equities near these levels based on sound economic fundamentals. However, the recovery has been arguably a bit fast considering some of the reasons for the decline have yet to be resolved. We think the S&P 500 could eventually move higher and make a run at our 3,000 fair value target, but we wouldn’t be surprised to see volatility pick up over the next few months.
Its Official – Happy 10th Birthday Bull Market Yesterday’s new all-time closing high by S&P 500 finally made it official. The current bull market is now in its eleventh year and is the second longest since 1949 and second best by performance with a 333.6% gain from its March 9, 2009 low through its closing high. Since 1949, the longest bull market lived over twelves years from December 1987 to March 2000 and gained 582.1%. Thus far the current bull has endured five corrections ranging from 10.2% to 19.8%. Tame inflation, a dovish Fed and the prospects for continued earnings growth suggest this bull is likely to continue.
10 Observations on New Highs We wrote about the new record high for the S&P 500 Index Wednesday . This is such a big market event we wanted to share some additional thoughts—10 of them in fact—on this market milestone: The new high secured March 9, 2019, as the 10th anniversary of the bull market. If the S&P 500 hadn’t made a new high before the next bear market, this bull would have ended short of the 10-year mark. Don’t fear new highs. Historically, buying stocks at all-time highs has been productive over the long term, as shown in the LPL Chart of the Day. Going back to 1950, the average 12-month gain from a new high for the S&P 500 has been 9.8%, excluding dividends. When new highs have been more than six months apart, as the last two were, average gains in the S&P 500 historically have been about 12% in the 12 months after the new record. For those worried that a new high means sub-par long-term returns, consider that the average 5-year annualized gain in the S&P 500 from all-time highs is 9%. For 10 years, it’s a still solid 7.4% (excluding dividends). History has shown stocks’ strong start to the year could mean further gains down the road. The average rest-of-year gain for the S&P 500 after a double-digit first quarter rally has been 6%. Global growth is supportive. Owning stocks when economic conditions are improving, as they are in the United States and China in particular, tends to be rewarding. We don’t think stocks are overvalued. The S&P 500 price-to-earnings ratio (PE) based on consensus analysts’ estimates for the next 12 months is 16.7, very reasonable considering low interest rates and inflation. Not all the possible good news is priced in. Investors may get more than they expect out of the U.S.-China trade deal, which could boost business confidence and capital investment. Earnings may be a positive catalyst. First-quarter earnings season is off to a good start overall, and we think 2019 expectations are too low. Sentiment is not overly bullish. Just 33.5% of individual investors are bullish, according to the American Association of Individual Investors. Other sentiment measures we follow are far from euphoric. Looking ahead, we believe there are enough potential positive catalysts to propel the S&P 500 to our year-end fair value target of 3,000 this year. At the same time, we acknowledge the risks, particularly overseas—Europe faces structural challenges, lackluster growth, and upcoming Brexit hurdles. The possibility of a pickup in volatility against a favorable fundamental backdrop supports our recommended market weight equities allocation.
Consumers Confident About Jobs Again Tue, Apr 30, 2019 Consumer Confidence for the month of April was released earlier this morning and handily topped expectations coming in at a level of 129.2 vs 126.8. Despite the rebound, the headline confidence reading remains well off its cycle high reading of 137.9 from six months ago back in October. One reason for the bounce in sentiment was jobs. After a sharp decline in sentiment towards the employment environment last month, the percentage of consumers who feel that jobs are 'plentiful' erased all of February's weakness and is once again back at its highest levels of the economic cycle. That didn't take long! This is an important development given the fact that this reading tends to roll-over ahead of recessions. When we saw the sharp decline last month, it raised some concerns, but now that it's right back at its prior highs, those fears can be set aside. Finally, with sentiment improving and the stock market rallying, consumers are feeling more confident about the stock market too. In this month's survey, the percentage of consumers expecting higher stock prices rose to 37.2% from 37.1%, while the percentage expecting lower stock prices dropped from 25.8% down to 24.1%. While it is never a good thing to see complacency towards the market on the rise, these readings aren't near the extreme levels we saw at points in 2018.
S&P 500 and NASDAQ Higher 76.2% of the Time on May’s First Trading Day Tomorrow, the first trading day of May has a bullish history over the past 21-years. DJIA, S&P 500 and NASDAQ have all averaged 0.5% or better on the day up twice as often as down (or better). S&P 500 and NASDAQ have the best record, up 16 times or 76.2% of the time since 1998. With an average gain of 0.41%, Russell 2000 is slightly weaker.
The Power of Productivity The U.S. labor market may be kicking the economic expansion into another gear. Consistent productivity growth has been largely absent from the expansion, even as payrolls and wages have grown at a healthy clip. However, strong labor market trends and last year’s pickup in capital expenditures growth could be sparking a resurgence in productivity, which we think could be key to future economic growth. As shown in the LPL Chart of the Day, productivity in the first quarter rose at the fastest year-over-year pace since 2010. Increased business spending is the primary catalyst for higher productivity, as better equipment and training boosts output per worker, although a tightening labor market has also helped. Labor shortages and accelerating wage growth normally incentivize companies to invest in boosting output with current labor. In turn, workers may get paid more as output increases, which could flow through to higher consumer spending. Growing productivity also helps offset rising labor expenses, as companies get more output per dollar spent, which can help mitigate inflationary pressures and support healthy profit margins for U.S. companies. First quarter unit labor costs rose only 0.1% year over year, the slowest pace of growth since the fourth quarter of 2013. “Labor market strength has been a pillar of the expansion,” said LPL Research Chief Investment Strategist John Lynch. “Job creation and wage growth remain healthy, and increased productivity points to stronger output without significantly higher costs.” The April jobs report, released May 3, showed U.S. hiring hasn’t wavered amid global uncertainty and trade tensions. Nonfarm payrolls rose 263K, higher than estimates for a 190K gain. Average hourly earnings grew 3.2% year over year, around the fastest pace of the cycle, and at a level that should continue to bolster consumer confidence and support consumer spending. The unemployment rate fell to 3.6%, a cycle low.
Relax It’s May Not China Trade War Fears A full blown trade war with China is not in anyone’s interest. President Trump’s negotiating style may be unsettling to the market at times, but neither country is likely to stand on ceremony to save face at the risk to their respective economies and markets. With the market at new highs and up big the first four months this year it is even more prone to short-term weakness in May. Our overall outlook for the year remains bullish as it has been since our Annual Forecast in December that was followed by a bullish January Indicator Trifecta. The historical strength of Pre-Election Years, which has been self-evident thus far this year, is supported by resilient economic and corporate readings, a dovish Fed clearly done with raising interest rates for the time being and a White House that is supportive of Wall Street. But, as you can see in the chart of Pre-Election Year Seasonal Patterns below, the Dow (black dotted line) and S&P (green dotted line) are already at historical average gains for the Pre-Election year and NASDAQ is way ahead of the pace up more than 20% for 2019 to date. Ostensibly, the S&P and NASDAQ are on the brink of clearing the last levels of resistance. But the Dow is struggling and Russell 2000 is well off the pace. S&P and NASDAQ made new all-time highs last month, but are straining to hold those levels and there is chatter in technical analysis circles about a bearish double top forming on the S&P and NASDAQ. Also evident in the chart here is the weakness often experienced in the latter part of May. So while we remain bullish on the year, we do expect the market to be weaker during the May soft patch and backing and filing during the Worst 4 Months July-October.
Market Celebrates Mother’s Day with Gains Over the last twenty-four years on the Friday before Mother’s Day the Dow Jones Industrials have gained ground sixteen times. On the Monday after, DJIA has advanced seventeen times. Average gain on Friday has been 0.19% and a respectable 0.49% on Monday. However, in four of the last seven years, the Monday following Mother’s Day has been down.
Earnings Estimates Stand Firm Earnings growth projections have remained positive globally, even as trade tensions have rattled financial markets this week. Lately, headlines on the U.S.-China trade dispute have distracted investors, and a few pockets of the global economy have weakened over the last several months. Fixed income markets have positioned for a marked economic slowdown with the yield curve again nearing inversion (long-term rates falling below short-term rates). Uncertainty can be uncomfortable, but in times of market volatility, we encourage investors to focus on long-term fundamentals instead of short-term noise. One of the fundamental pillars we like to focus on is company earnings. As shown in the LPL Chart of the Day, earnings in all three major global regions are expected to rise this year. U.S. companies are poised to lead, with consensus expectations for 4.2% profit growth in 2019. “The bar for earnings results is low because of heightened uncertainty,” said LPL Research Chief Investment Strategist John Lynch. “Economic growth may be moderating internationally, but we see enough catalysts ahead to drive another year of record profits in the U.S.” U.S. company profits escaped last quarter’s soft patch, based on earnings results from about 85% of constituents that have already reported. S&P 500 Index profits likely grew about 1% year over year in the first quarter of 2019, markedly better than the 2–4% decline expected at the beginning of the reporting season, depending on the data source. Better-than-feared earnings have helped push the S&P 500 to all-time highs over the past few weeks and we expect improving earnings to carry stocks going forward. Earnings expectations for developed and emerging markets (EM) are below U.S. projections. However, we think EM earnings projections may be too pessimistic. Global market volatility, trade tensions, and a strong U.S. dollar have contributed to reduced EM growth expectations in recent months, but we think the Federal Reserve’s pause should help cap gains in the U.S. dollar and help fuel stronger global currencies and EM economic activity.
Compounding Interest: The 8th Wonder Of The World “Compounding interest is the eighth wonder of the world.” Albert Einstein When should you start investing? Yesterday is one of the best answers we can think of. As Einstein stated in his quote, compounding interest can be extremely powerful for investors over time. Compounding interest essentially means “interest on interest,” and it’s why so many long-term investors have been successful. “Yes, investing can be volatile, and periods like December 2018 can make it quite tough, but if you are saving for retirement and have potentially decades to go until retirement, one of the best things you can do during periods of market stress is nothing,” explained Senior Market Strategist Ryan Detrick. “By ‘nothing’ we mean you should stick to your financial plan.” By dollar-cost averaging into a retirement plan through the ups and downs of markets and over a period of years and decades, your nest egg has significant growth potential thanks to—among other reasons—compound interest effect on the earnings. Here’s a powerful example. Our LPL Chart of the day shows two hypothetical investments, both assuming an annual return of 8%. In the first scenario, an investor puts away $3,000 a year from the age of 21 until age 30, then stops. The second scenario assumes an investor starts to invest $3,000 a year from the age of 31 until age 70. Incredibly, the investor who invested only 10 years, but started 10 years earlier, has more money at age 70 (over $1 million!) than the investor who put money away for 40 years—simply because the investor started earlier and let compounding interest work its magic.
Friday Best Day of Week in 2019 Up until the end of April, S&P 500 was enjoying one of its best starts to a year since 1987. Daily gains were commonplace and spread throughout the trading week. However, Friday (or the last trading day of the week when Friday is a holiday) has enjoyed the greatest and most consistent gains so far this year (as of May 10, 2019 close). DJIA, S&P 500, NASDAQ and Russell 2000 have all averaged over 0.50% on the last trading day of the week. S&P 500 and Russell 2000 have been up 16 of 19 (84.2%) last trading days of the week. Even last Friday produced gains as tariffs were implemented. Should this track record of strength on Friday begin to fade, the overall market could soon follow as it would be a clear signal that risk appetite is declining.
