First Trading Day of the Year: DJIA Up 9 of Last 11 In contrast to the last trading day of the year, the first trading day of the New Year has a bullish track record recently. Since 2009, DJIA has advanced nine times in eleven years with an average gain of 0.71%. S&P 500, NASDAQ and Russell 2000 have risen in eight of those years with averages gains of 0.85%, 1.01% and 0.73% respectively. However, the longer-term history, back to 1989, has not been as strong. DJIA is best, up 67.7% of the time with an average gain of 0.33% while Russell 2000 has only advanced 41.9% of the time with an average loss of 0.03%.
A Banner Year for US Equities Thu, Jan 2, 2020 2019 was surely a banner year for US equities. With a total return of 31.5%, the S&P 500's gain in 2019 was nearly three times the historical average 12-month return of 11.7%. That's strong! In the chart below we compare the S&P 500's annualized returns over the last one, two, five, ten, and twenty years to its average annualized returns over those same time frames since 1928. While the one-year return sticks out like a sore thumb, we would note that the S&P 500's annualized returns over the last two, three, and ten years are also above average. Almost as notable as the fact that the one year return has been so much stronger than average is that the S&P 500's two-year return is less than two percentage points above its historical average. That just shows how bad 2018 was! Looking further out, the only time frame where returns are below average is over the last twenty years where the 6.1% annualized gain is almost five percentage points below the historical average. Over a full twenty years, that's a difference of tripling your investment versus making eight times your investment! The chart below compares how current returns during the above time frames rank on a percentile basis relative to all other periods. The S&P 500's one-year return ranks in the 85th percentile which is pretty extreme. For the two, five, and ten year periods, though, current returns are much more middle of the road. Conversely, as stretched as extreme to the upside that the one-year return is relative to all other periods, the twenty-year return is even more depressed to the downside. At just 4.6, more than 95% of all other 20-year periods have been better than the last 20. Finally, as mentioned above the last year has certainly been a strong one, and it follows a year where returns had been abnormally poor. The chart below shows the rolling 12-month total return for the S&P 500 going back to 1990. The gain of 31.49% over the last year was the strongest for the S&P 500 in six years coming up just shy of the 32.39% gain in 2013. Last year at this time, though, the S&P 500 was down over 4% on a total return basis in the prior 12 months.
Yield Curve’s the Biggest Fixed Income Story of 2019 The inverted yield curve was the biggest story of 2019 in the bond market. Historically, when long-term bond yields fall below short-term yields, as the 2- and 10-year Treasury yields did in August, recessions have tended to follow, though with wildly varying lead times. Thankfully, the yield curve has normalized since then as the 10-year yield has rallied. “The recent steepening of the Treasury yield curve is an encouraging sign for the U.S. economy and markets,” said LPL Chief Investment Strategist John Lynch. “Continued calmness in the credit markets suggests this popular recession signal may have given us a false positive this time around.” An honorable mention for the biggest bond market story of 2019—and one of the reasons the yield curve inverted—is the massive mountain of negative-yielding sovereign debt amid unprecedented accommodation from global central banks. Negative-yielding sovereign debt reached $17 trillion in August 2019 before rising yields globally whittled the total down to $11.3 trillion as of December 31, 2019. Progress toward normalization of global monetary policies and bond markets will be a key trend to watch in 2020. Against this backdrop, fixed income still delivered a lot of winners in 2019. The Bloomberg Barclays U.S. Aggregate Bond Index, the domestic bond benchmark we track, returned 8.7% for the year. Both investment-grade and high-yield corporate bonds delivered impressive double-digit returns, while even the weakest bond sectors we track posted respectable gains, as shown in the LPL Chart of the Day.
What a year it was in 2019! It was the best year for stocks (S&P 500 Index) since 2013 and the best year for bonds (Bloomberg Barclays U.S. Aggregate Bond Index) since 2002. The diversified investor had an especially good year: A hypothetical 60/40 portfolio with 60% in S&P 500 stocks and 40% in a diversified portfolio of bonds would have posted its best annual performance since 1997. In 2019, markets also more than made up for the pain of 2018. That was the first year since 1969 in which both stocks and bonds were down during the same year. Looking out to 2020, it might seem unlikely the strong momentum in stocks could continue. However, history shows the S&P 500 typically has posted above-average performances in the year after a big annual gain, and we’ve tended to avoid a recession. A big year for stocks historically has been a good sign for the economy, too. “Are the big gains in 2019 forecasting blue skies ahead for the economy and a bull market in 2020?” asked LPL Senior Market Strategist Ryan Detrick. “History would say yes, as a 30% gain for the S&P 500 has led to gains of another 15% on average the next year, and only 2 out of 12 times did that following year fall into a recession.” As the LPL Chart of the Day shows, when the total return for the S&P 500 has been up more than 30%, stocks have posted above-average gains and the economy rarely has fallen into recession in the following year. We’re hoping 2020 does the same.
Services Sector Bounces Back Tue, Jan 7, 2020 Unlike the manufacturing sector which continues to find itself stuck in contraction, the Services sector (Non Manufacturing) continues to show growth. The latest release of the ISM Services sector highlights this trend as the headline index bounced from 53.9 up to 55.0 this month versus expectations for a bounce to 54.5. If we combine this month's Services reading with this month's Manufacturing reading and weight them based on their share of the overall economy, the overall December ISM bounced from 53.3 up to 54.1. In the case of both the Services (first chart below) and the combined ISM readings, we have seen a nice bounce from lows last fall which threatened to take out the prior lows from 2016. Unlike the commentary section for the manufacturing sector which was almost universally negative, commentary in the Services sector was much more positive. Looking at trends within the December ISM Services report, breadth was skewed moderately positive on a m/m basis in this month's report with five categories showing growth, four declining, and Prices Paid unchanged. Relative to last year, though, declines were much more widespread. Looking ahead to this Friday's Non-Farm Payrolls report, unlike the manufacturing sector where the employment component dropped to its lowest level in nearly four years, the decline in the employment component of the Services sector was much smaller and is still comfortably in the range of growth at 55.2. The biggest move in this month's report, though, was in Business Activity which surged from 51.6 up to 57.2. Looking at the chart for this category over the last several months shows a volatile ride. After hitting its highest level in over a decade last February, it dropped to its lowest level since December 2009 last month but then saw a considerable bounce from 51.6 up to 57.2.
378 Days since Last 10% S&P 500 Correction & Still Counting There is little doubt that 2019 was a good year for the market. DJIA advanced 22.3%, S&P 500 climbed 28.9% and NASDAQ jumped 35.2% in 2019. Even for a pre-election year, those gains are above average. Gains of this magnitude also have a tendency to cause some uneasiness as valuations are generally getting stretched and thoughts turn to profit taking or the possibility of a pullback or a correction. S&P 500 completed its last correction (defined as a 10% or greater decline, but less than 20% because that would be a bear market then) on December 24, 2018 after falling 19.8%. That was 378 calendar days ago and it was the fifth correction of the current bull market that begun on March 9, 2009. Since 1948, the current bull market is the second longest in duration and magnitude. The longest was 4494 calendar days from December 4, 1987 through March 24, 2000. S&P 500 gained 582.1% during that bull while enduring five corrections. Even though it has been 378 days since the last does not mean one is imminent. S&P 500 has gone as along as 2553 calendar days without a correction before (October 1990 through October 1997).
How Stocks Do During Geopolitical Events It was a volatile night for the U.S.-Iran conflict. S&P 500 Index futures dipped 1.5% and global markets swung after Iran shot several ballistic missiles at U.S.-Iraqi military bases. Markets recovered their losses overnight on news that there were no American casualties, but tensions remain high in the Middle East. As concerns over the Iran conflict continue to build, we’ve received many questions asking what this could mean for the market outlook. We discussed our initial thoughts regarding the conflict in our January 6 blog, but we believe it is important for investors to remember that there have been many times historically when stocks stood strong in times of conflict. In fact, the best ever annual Dow Jones Industrial Average gain was in 1915 during World War I. “No doubt worries over Iran have investors on edge,” explained LPL Financial Senior Market Strategist Ryan Detrick. “Stocks could be volatile for a while, but the impact to stocks from geopolitical events historically has tended to be short-lived.” As our LPL Chart of the Day shows, the S&P 500 fell 5% on average in 20 major geopolitical events dating back to the attack on Pearl Harbor in 1941. However, the S&P 500 recovered those losses in fewer than 50 calendar days on average. A special thanks to Sam Stovall of CFRA for sharing the data below with LPL Research.
Markets Gone Wild Wed, Jan 8, 2020 Today's reversals in the financial markets were really the types of moves that don't come around too often. Exhibit 1 is gold. After rallying more than 2.5% from Tuesday's close, gold hit a 52-week high only to reverse lower throughout the trading day. As we type this, it's now down over 1% from Tuesday's close. Going all the way back to 1980, there have only been six other days where gold rallied more than 1% to a 52-week high only to finish the day down over 1%. The swing in crude oil was even larger. Earlier in the day, WTI was up over 4% relative to Tuesday's close. Do you know where it finished? Down over 4%! All in all, WTI traded in a range of 9.9%. How's that for a volatile session?
Why The First Five Days Of 2020 Could Have Bulls Smiling The first five days of 2020 are in the books. Although the headlines have been quite scary, equities have picked up right where they left off last year. In fact, after the first five trading days of the new year, the S&SP 500 Index is up a respectable 0.65%. Jeffrey Hirsch of The Stock Trader’s Almanac follows and tracks many interesting seasonal patterns. One that we find very interesting states that how stocks perform the first five trading days of a new year could indicate how the full year will go. Now, we’ll be the first to admit no one should invest based only on this adage, but the results have been quite compelling. We did some research and found that when S&P 500 returns in the first five trading days of a new year have been higher, the full-year total return for the S&P 500 has been positive 80% of the time. Compare that to returns being up only 60% of the time when the first five days have been lower, and we have something that has our attention. What about big gains? Well, when those first five days have been up more than 2%, the full year return has been positive a very impressive 16 of 17 times! Only 2018 didn’t follow suit when the first five days were up 2% or more. “Should you ever invest for a full year purely because of the first five days? We would emphatically say no,” explained LPL Financial Senior Market Strategist Ryan Detrick. “But put in context, this seemingly random bit of info does have a very impressive track record. It is only a small piece of the pie, but the good news is we still don’t see any major warning signs that this bull market is over just yet.” As shown in the LPL Chart of the Day, when the S&P 500 has gained more than 0.65% the first five trading days of a new year—like 2020—the full year has finished in the green 31 out of 35 times, with a very solid 17.2% average annual return. Although we aren’t expecting gains quite that large in 2020, it does help support the case for the bull for at least the rest of this year.
Mystery Chart Unveiled - Tremendous Breakout Mon, Jan 13, 2020 Last Thursday, we posted the following 'mystery chart' on Twitter, and asked whether it was a "buy" or a "sell." Judging simply by the looks of it, the chart looks pretty attractive. It's clearly trending higher, and after a brief pullback in the second half of 2019, it has seen a sharp rebound putting last year's highs back into play. While it was only last week that we originally tweeted the chart, since then there has been a clear breakout above the summer high (~50). From a technical perspective at least, it looks like our 'mystery chart' has experienced a classic breakout. So what exactly is this mystery chart which appears to be in the early stages of a new leg higher? Drumroll, please! It's actually the probability of President Trump winning re-election in November according to the website electionbettingodds.com. At the current level of 53.1%, the market's pricing of President Trump's re-election has never been higher. While President Trump's chances of winning re-election have seen a big boost lately, these gains have also been accompanied by some interesting moves on the Democratic side. Last Friday, a new Des Moines Register poll showed that Senator Bernie Sanders took the lead for the first time in its polling for the February 3rd Iowa caucus. At 20% in the poll now, Sanders hardly has a commanding lead, and three other candidates are polling at 15%+ (Warren, Buttigieg, and Biden). As a result of that poll, though, we saw a sharp drop in Biden's chances of winning the nomination and further gains for Sanders after what has already been a strong showing in the last several weeks. Whether the reasoning for Trump's recent gains is that Sanders is less likely than Biden to win in a general election or that the party will be too divided to generate enough excitement around one candidate in a general election, the betting markets seem to be interpreting the recent surge in Sanders' standing in the polls as a positive for President Trump's re-election. That's a positive for Trump fans in the present, but just like technical analysis, the election betting markets haven't exactly had a perfect record at predicting the outcome of events.
Sanders has a better chance against Trump than Biden does, IMO. Biden is like Clinton 2.0 with worse record.
January Trifecta Jackpot for Stocks Solid across the board gains this year have put another January Trifecta Jackpot in our sights for 2020. So far our January Trifecta is two for two. Our First Five Day (FFD) early warning system came in positive up 0.7% on January 8 following up on a positive reading for our Santa Claus Rally (SCR) on January 3. The January Trifecta would be satisfied with a positive reading from our January Barometer (JB) at month’s end. We just published an update on The Incredible January Barometer: Only 11 Major Errors in 82 Years that runs through the reasons behind the efficacy of the January. We discuss how the passage of the Twentieth “Lame Duck” Amendment to the Constitution in 1933 created the January Barometer. We also compare the January Barometer results along with the full year results, the following eleven months results, and the subsequent twelve months results to all other “Monthly Barometers” using the Dow Jones Industrials, the S&P 500 and the NASDAQ Composite The best case, most bullish scenario is when all three indicators, SCR, FFD and JB, are positive (in table below). In 31 previous Trifecta occurrences since 1950, S&P 500 advanced 87.1% of the time during the subsequent eleven months and 90.3% of the time for the full year. However, a January Indicator Trifecta does not guarantee the year will be bear or correction free. Of the four losing “Last 11 Mon” years, in the table, 1966, 1987 and 2011 experienced short duration bear markets (2011, S&P 500 –19.4% peak to trough). In 2018, S&P 500 retreated 19.8% from its September high close to its December low close. Even if S&P 500 was to suddenly reverse course and finish the full month in the red, the prospects for the next eleven months and the full year remain decent. Of the last 10 times since 1950 that the SCR and FFD were both positive (and the full-month January was negative), the next eleven months advanced 80% of the time and full year advanced 70% of the time with gains of 7.4% and 2.9% respectively. A positive SCR and FFD are encouraging and further clarity will be gained when the January Barometer (page 16, 2020 Stock Trader’s Almanac) reports at month’s end. A positive January Barometer would certainly boost prospects for full-year 2020. The December Low Indicator (2020 STA, page 34) should also be watched with the line in the sand at the Dow’s December Closing Low of 27502.81 on 12/3/19.
More New Highs Than Lows Tue, Jan 14, 2020 Included with each day's Morning Lineup and Closer is our Daily Sector Snapshot which offers a look across the internals of the S&P 500 and its eleven individual sectors. One such indicator covered is the net percentage of stocks reaching new 52-week highs. This is essentially the difference between the number of stocks that closed at a 52-week high and 52-week low for a given day. Typically you would want to see positive readings as it would indicate more positive momentum. For multiple sectors, this reading has begun to spike up recently. Perhaps the most obvious of these is for the Communication Services sector which topped out at 30% about one week ago as many of its stocks have recently outperformed including some of the largest like Facebook (FB) and Google's parent company Alphabet (GOOGL). For this sector, these were by far the highest new-high readings of the past year. The Technology sector likewise peaked at over 30% last week although for this sector such readings have more precedence in the past year. Similarly, Consumer Staples, HealthCare, and Financials have also begun to pick up over the past several days. While these are working their way back up to similar readings to a few weeks ago, the Utilities sector has begun to see some of the highest number of net new highs since the fall. At the current moment, the Materials sector is the only one with more 52-week lows being made than 52-week highs.
Possibilities Abound In Beige Book Bounce Thu, Jan 16, 2020 The latest Beige Book data on qualitative economic conditions in the 13 Federal Reserve districts spread around the country was released yesterday. Our Beige Book Index counts the relative frequency of positive and negative terms used by the Beige Book in discussing the status of the economy and labor markets in each district. Generally speaking, this index correlates reasonably well with the growth of the economy, as shown in the chart below. The latest data suggests the possibility of a re-acceleration in growth in Q1 and Q2, though the index is definitely not recording the kind of strength it did at the peak for growth in 2018 and 2019. One worrying observation was “job cuts or reduced hiring” at manufacturers in “a number” of districts; that would be consistent with the sudden decline in factory hiring in December per the most recent payrolls numbers. A paradox was also visible in the claim of “widespread labor shortages” despite “modest or moderate” wage increases; how can labor be truly scarce if its price isn’t rising briskly? Business contacts did note “solid” holiday spending along with “strengthened” residential markets and “moderately” expanded vehicle sales. All-told, the Beige Book signaled an improved pace of growth but by no means a dramatic acceleration in activity.
Claims Come in Low Thu, Jan 16, 2020 It's been a little over a month since initial jobless claims reached their highest level since 2017 at 252K. Since that peak, jobless claims have fallen for five consecutive weeks for a total drop of 48K. That is the longest such streak since April of last year, and also the largest decline in claims during such a streak since October 2017 (55K). Now at 204K, jobless claims are the lowest they have been since the end of November when they dropped to 203K. Back at the low end of the past year's range, claims have completely reversed the spike from just a few weeks ago. In order to take out the cycle low of 193K from last April, though, claims would also need to decline by another 11K. The aforementioned peak of 252K shook up the picture for the labor market at the end of 2019 including the four-week moving average which typically helps to smooth out week to week fluctuations in the data. Fortunately, over the past couple of weeks, the data has moderated considerably. Last week was significant with regards to the moving average given that 252K peak had rolled off the average allowing it to experience its first decline in a month. That has continued this week as another recent high of 235K likewise came off the average to be replaced by this week's much lower 204K print. While not as large as last week's 9.5K decline, the moving average experienced another sharp decline of 7.75K to 216.25K. All-in-all, the moving average has now fallen 17.25K off of its peak of 233.5K that was put in place just a couple of weeks ago. As shown in the chart below, the two-week decline in the moving average has been the largest since early October of 2017 even if the average itself is only at its lowest level since early November of last year. As for the non-seasonally adjusted data, claims rose slightly from last week to 336.9K. As we have mentioned last week, the first couple weeks of the year typically put the annual peak in place. With claims slightly higher this week compared to last, the 336.9K print is likely to be this year's high. If that is the case, this year's peak would be 14K below last year's and also down 7.6K YoY compared to the current week of the year last year.
Homebuilder Sentiment Remains Strong Thu, Jan 16, 2020 Homebuilder sentiment declined in January, but the drop came on the heels of a much stronger than expected December where overall confidence surged to the highest level in over 20 years. While economists were expecting the headline index to fall from 76 down to 74, the actual decline was just one point to 75. Even with this month's decline, though, overall homebuilder sentiment is higher than all but four other months in the history of the index. With a strong economy and low-interest rates, how can you fault homebuilders for being positive? Breaking out sentiment by sales trends and regions was a mixed picture. While Present Sales dipped, Traffic was actually higher which would seem to confirm reports that the Spring selling season is starting off early this year. On a regional basis, sentiment in the Midwest dropped sharply in January, but keep in mind that followed a monster surge in December. In fact, this month's seven-point decline in sentiment for the region erased less than half of last month's increase. Outside of the Midwest, sentiment in the South was unchanged (right near highs for the cycle), while the Northeast and West (also at cycle highs) both saw improved sentiment.
Bulls Come Back Thu, Jan 16, 2020 Even though equity markets shrugged off geopolitical tensions last week, sentiment actually declined based on AAII's weekly survey. However, as equities have continued to move higher over the past week on solid earnings and the situation in the Middle East has further simmered down, sentiment has picked back up. This week, 41.83% of investors reported bullish sentiment, up from 33.07% last week. Although this only brings bullish sentiment to similar levels as the final week of 2019, that 8.76 percentage point increase this week was the largest weekly increase since mid-October. This also lifts it back above its historical average of 38.08%. Even though bullish sentiment has surged, bearish sentiment was little changed at 27.5%; just 2.39 percentage points lower than last week. Thanks to the pick up in bullish sentiment, the bull spread has once again widened to 14.32 in the bull's favor. Other sentiment readings like the Investors Intelligence survey similarly have seen stable bearish sentiment recently as bearish sentiment was unchanged at 17.8%. Considering most of the gains in bullish sentiment did not come from bears, neutral sentiment tanked to 30.66%. That is the largest weekly decline since August 8th when it fell 7.35 percentage points compared to the 6.38 percentage point drop this week. While it's now at the lower end of the past year's range, just two weeks ago neutral sentiment topped 40%. Declining 10.25% in that time, this was the first time that neutral sentiment experienced a double-digit drop in the span of two weeks since May. This drop has also snapped a 22-week streak that neutral sentiment has remained above its historical average. Going back through the history of the survey, there have only been five longer streaks, the next longest of which ended at 25 weeks in 2017.
Global Equities Closing In On A Breakout Fri, Jan 17, 2020 Below is a chart of the Bloomberg World Equity Market index, which is a cap-weighted index made up of nearly 5,000 publicly listed companies around the world (including the US). While the S&P 500 is up more than 15% from its January 2018 high, it's notable that we still haven't seen equities break out on a global scale. As shown, the Bloomberg World Index is now just a hair below its prior all-time highs (22 basis points to be exact).
A Closer Look At Election Years 2020 is off to a roaring start, picking up right where 2019 left off. Many investors are eyeing the upcoming presidential election as an impending storm for the stock market. In the four-year presidential cycle, pre-election years have tended to be the strongest for stocks, as sitting presidents have taken measures to boost the economy and stock market higher to garner votes. It sure worked out well last year, with the S&P 500 Index’s 31% total return. Returns in election years, however, have been quite bifurcated. “If an incumbent president was up for reelection, stocks tended to do extremely well,” explained LPL Financial Senior Market Strategist Ryan Detrick. “On the other hand, if there was a lame duck president in office, returns were quite muted.” Note that a “lame duck president” means the sitting president either isn’t running for reelection or has already fulfilled the maximum two terms. It makes sense, as the president could be less motivated to do things to heat up the economy if they know they are leaving office. Possibly, investors may also get cold feet knowing a change is coming. The S&P 500 was down in 2000 and 2008, and the sitting president was a “lame duck president” both years. In the LPL Chart of the Day, we break down election years by whether the president was running for reelection or a lame duck. The chart shows the S&P 500 up an impressive 11.7% on average if the President was running for reelection, compared to up an average of 2.4% if president was a “lame duck president”. Given most presidents who have run a second time have tended to win, this could be the market’s way of saying it is comfortable with the status quo over change. Another encouraging historical trend is that the S&P 500 hasn’t been lower during an election year with an incumbent president up for reelection since 1940. To be clear, stocks have been up during election years when the incumbent president actually lost. In 1980, the S&P 500 gained nearly 26%, but Jimmy Carter still lost to Ronald Reagan. In other words, this does support the notion of higher stocks in 2020, but higher stocks can’t always tell you who will win in November.
