US Continues to Gain Share of World Market Cap Wed, Feb 12, 2020 The United States dominates the rest of the world in terms of its share of total equity market capitalization. Currently, US stocks make up over 40% of global equities' total market cap. No other country comes even close to this size with the next largest country being China with just 8.47% and then Japan with 7.09%. Hong Kong is the only other individual county with a share larger than 5%. While France is the largest European Union country stock market in terms of the percentage of world market cap at only 3%, the total share of all EU countries shown sits at over 10%. Former EU member, the United Kingdon, is also one of the larger countries but has consistently lost share over the past decade. So far this year it has lost another 0.2%. One interesting change that we noted at the end of last year has been the massive increase in Saudi Arabia's share thanks to one of the world's largest companies, Saudi Aramco, hitting public markets. Although it has led to a massive jump over the long run, since the start of the year Saudi Arabia's share of market cap has fallen 14 bps likely due to Saudi Aramco being a one-way trade lower off of its highs that were put in place only a few days after its IPO. Meanwhile, the US has taken another 1.17% of the world's market cap in 2020 alone. While there are several individual countries that are actually outperforming the US so far in 2020, generally speaking, the US has outperformed the rest of the world which is why the US has taken more market cap this year. Whereas the S&P 500 was up 3.93% YTD as of yesterday's close, MSCI's World Index excluding the US is just about flat. That trend of US outperformance has been in place for much of the past year well before the coronavirus hit Asia in December. Another interesting country to note is China. 2020 has been off to a rocky start thanks to the coronavirus. This had sent the country's share of global market cap plummeting down to ~8% on February 3rd. That was its lowest level since February of last year. But as this month has progressed and the situation surrounding the virus has improved, China has regained some of those losses and is now sitting with a larger share of world market cap than it ended 2019 with.
A Record Pace of Records Wed, Feb 12, 2020 Le'ts preface this with the fact that it's still early in the year and the rest of the year is unlikely to closely follow the path we have seen so far, but the S&P 500 is currently on pace for its 11th record closing high this year. While we're just 29 trading days into the year, in the post-WWII period, 2020 already ranks as the 33rd highest number of record closing highs for the S&P 500 in a given year (out of 76). What's even more notable, though, is that at the current pace the S&P 500 would have 96 record closes this year, which would dwarf the total from every other year. For reference, the highest number of record closing highs in a given year was 77 in 1995, and there are only four other years (1961, 1964, 2014, and 2017) where there were more than 50 record closes.
Closer Look At February A late month selloff in January saw the S&P 500 Index close marginally lower for the month. But stocks have taken off in February, with the S&P 500 up nearly 4% this month, as US economic data remains strong and fears over the worst-case scenarios for the coronavirus appear overblown. Historically, February has been a month when stocks tend to take a bit of a break. As shown in the LPL Chart of the Day, the S&P 500 has been flat, on average, during the second month of an election year. What is most interesting, though, is how weak October has been historically leading up to presidential elections, yet how strong stocks have been in November and December as political uncertainty clears following elections. Maybe the big gains so far this month shouldn’t be a total surprise? “Yes, February historically has been a troublesome month for stocks,” said LPL Financial Senior Market Strategist Ryan Detrick. “Yet over the past decade, no month has seen better returns.” In fact, the S&P 500 has gained 2.34% on average in February over the past decade, compared with the second best month of October’s gain of 2.29%.
Trading Before Presidents’ Day Weekend Mixed, But Big Improvement Last 10 Years From last week’s post, we know the week before Presidents’ Day weekend has a bullish history going back to 1990. More recently, since 2011, the Thursday and Friday before Presidents’ Day also have been bullish (shaded in light grey in table below). DJIA on Friday has the best record over the last ten years, up ten times with an average gain of 0.65%. However the longer-term track record of the market has not been as strong. From 1990 through 2010, DJIA, S&P 500 and NASDAQ suffered numerous and sizable declines especially on Friday. When all 30 years are considered Thursday has enjoyed the most gains and modest average gains. Friday ranges from mixed for DJIA to outright bearish for NASDAQ and average losses prevail.
Claims Up But Still Low Thu, Feb 13, 2020 Initial jobless claims this week rose slightly up to 205K from 203K last week which was the lowest reading this indicator had reached since its lows from last spring. While this week marked the first uptick in nearly a month, the actual reading was still well below estimates for an increase to 210K. This leaves jobless claims at the bottom of the past year's range and still only 12K above its recent low of 193K from April of last year. In other words, this week's increase was overall not that bad as claims still remain at very healthy levels. The moving average, which helps to smooth out the week to week fluctuations of the high-frequency data, went unchanged this week at 212K. This is a result of this week's 205K number replacing an equivalent reading from five weeks ago. That marks the first time that the moving average did not move up or down week-over-week since November of 2017. As with the unmanipulated data, although it is not quite there yet, the moving average is sitting at some of its lowest levels since April's multi-decade lows. Non-seasonally adjusted jobless claims continue to experience their seasonal decline following the peak that was put in place in the first weeks of the new year. Claims fell to 219K this week from 224.7K last week. That is the lowest level for non-adjusted claims for the current week of the year of the current cycle. Continuing jobless claims, which are lagged one week from initial claims data, have also begun to tick lower recently after rising sharply in the past few months. This week's reading fell from 1751K to 1698K which was larger than the expected reading of 1734K. This week's drop also marked the first time since November that continuing claims fell below 1700K. Additionally, we recently have highlighted how continuing claims have begun to show persistent YoY increases over the past few months for the first time of the current cycle. Now, this is not a massively negative sign as such readings have been observed outside of recessionary periods in the past (like the early 2000s shown below), but it is something that raises a flag. The past few weeks have given some relief to this as continuing claims are beginning to tick lower year-over-year again as shown in the second chart below.
Can Congress Get Along For Valentine’s Day? We continue to receive many questions about stock and economic performance during election years, which we’ve tackled in our recent blogs, “Another Look at Election Years” and ”A Closer Look at Election Years.” What about Congress? We have divided government in Washington. Do we think they will be able to kiss and make up in time for Valentine’s Day? Odds are slim that will happen, but there is a silver lining. A split Congress historically has seen better stock market performance and economic growth, measured by gross domestic product (GDP). Remember, the Republicans currently have control of the Senate, while the Democrats control the House. “Washington appears as divided as it has ever been,” explained LPL Financial Senior Market Strategist Ryan Detrick. “But don’t forget the best stock market returns actually take place under a split Congress. Maybe the best Washington is the one that can’t get much done?” As shown in the LPL Chart of the Day, the S&P 500 Index has gained nearly 18% per year on average under a Republican president and a split Congress. Additionally, GDP growth has been strongest under a split Congress. Our country’s founders designed the US government with checks and balances to limit the power of any one party and prevent policies from swaying too far in one direction. Isn’t it something that nearly 250 years later, their original design is as relevant today as it was then? We don’t know which party will occupy the White House in 2021, nor will we offer a prediction. However, the odds look good that Congress remains split after the November 2020 elections, and that may not be so bad for the stock market.
New All-Time Highs for S&P 500 and NASDAQ – Well Above Average Gains in Election Year As of today’s close, DJIA is up 2.84%, S&P 500 +4.81% and NASDAQ is up a whopping 9.41% year-to-date. All three indexes are well above their respective historical averages for this time of an election year. NASDAQ has in fact already exceeded its average full election year performance going back to 1972. Bullish sentiment and momentum appear to be firmly in place and historical election year patterns suggests strength could easily continue for DJIA and S&P 500 into May. NASDAQ’s surge higher could be vulnerable to a retreat sooner, in March.
Jobless Claims Match Expectations Thu, Feb 20, 2020 Initial jobless claims totaled 210K this week, matching expectations but rising slightly from an upwardly revised 206K last week. Despite the increase, claims remain low no matter how you measure it. The past few weeks have seen claims come in at some of their strongest levels since the cycle low of 193K that was put in place back in April. Without a continued move to the downside though, that April low is still firmly in place. That means it has now been 44 weeks without a new cycle low in seasonally adjusted jobless claims. Looking back since the end of the Financial Crisis, that ties another 44-week long streak that came to an end in July of 2014. Given claims remain at healthy levels just off of those cycle lows, this seems to point more towards the indicator having plateaued rather than deteriorating. Even though claims rose this week, a higher reading of 223K rolled off of the four-week moving average which led the average to drop 3.25K. That leaves the four-week average at 209K which is the lowest reading since mid-April when it reached 206K. That was also only one week after the moving average put in its cycle low of 201.5K On a non-seasonally adjusted basis, jobless claims continued to decline as is seasonally normal for this time of year, falling to 208.3K. That is 2.4K lower than the comparable week last year and the lowest reading for the current week of the year for all years of the current cycle. Given this, it is also well over 100K below the average for the current week of the year since 2000.
Philly Pops Thu, Feb 20, 2020 After a strong report on manufacturing in the New York area earlier this week, the Philly Fed Manufacturing report one-upped its neighbor with a blowout report. While economists were expecting a modest decline in the headline reading from 17.0 to 11.0, the actual reading came in at 36.7, more than triple expectations! This was the strongest reading for the headline index since February 2017, but before that, you have to go all the way back to December 1993 to find a stronger reading. Not only that, but relative to expectations, this month's report was the biggest beat on record (going back to 1998). Not only was this month's report strong, but it also followed the January report which also increased 14.6 points on a m/m basis. Combining the back to back increases together, it was the strongest two-month increase in the Philly Fed headline index since September 1995 and the third strongest two-month gain in the history of the report going back to 1980! Breadth in this month's report was also very positive as just two components -- Prices Paid and Number of Employees -- declined. Meanwhile, a number of components saw double-digit increases including New Orders, Unfilled Orders, and Inventories. When it comes to the Philly Fed Manufacturing report, they don't get much stronger than this!
Sentiment Stable Thu, Feb 20, 2020 With the major indices little changed over the past week, sentiment readings from AAII's weekly investor survey likewise moved only slightly. The percentage of respondents reporting as bullish remains above 40% but pulled back slightly from 41.33% last week. The 0.73 percentage point drop was the smallest move in bullish sentiment (either positive or negative) since November 28th of last year when bullish sentiment fell only 0.6 percentage points. With bullish sentiment declining, respondents reporting as bearish picked up the difference rising 2.3 percentage points to 28.7%. Although up versus last week, bearish sentiment remains fairly subdued at 1.63 percentage points below the past year's average of 30.33% and around the low end of the past several years' range. Neutral sentiment was also little changed, dropping 1.47 percentage points to 30.8%. Similar to bearish sentiment, neutral sentiment continues to come in at the low end of its range as it has averaged readings of 35.9% over the past year. This was the sixth week in a row that neutral sentiment has come in below its 52-week average; the longest such streak since a 15-week long streak ending in January of last year.
The Coronavirus Outbreak Is Spreading News that the coronavirus—known as COVID-19—has spread to South Korea, Italy, Japan, and Iran, has led to massive selling around the globe, with many European markets closing down more than 4%. U.S. stock markets are selling off hard as well, with the S&P 500 Index down nearly 3% in early trading on Monday. “Although the fear over the pandemic is real, and the potential slowdown in the global economy could hurt 2020 corporate profits, let’s not forget that big down days are part of what long-term investors have had to accept,” said LPL Financial Senior Market Strategist Ryan Detrick. As shown in the LPL Chart of the Day, an average year has more than five separate days with at least a 2% correction for the S&P 500 Index. Even last year, with stocks up 30%, there were five separate days that saw the S&P 500 close down at least 2%. The United States had held up relatively well in the face of the growing COVID-19 crisis. In fact, according to LPL Research’s friend Sam Stovall of CFRA, the S&P 500 actually gained 1.6% a month after the first reported coronavirus case in the United States on January 21. As the chart below shows, stock market gains historically have been normal after the initial outbreak of various health crises have reached the United States. Now, could the coronavirus impact the global economy more than previous epidemics and pandemics? That’s clearly a strong possibility, as global supply chains have come to a halt in the world’s second largest economy (China). The good news, though, is corporate America just reported a very impressive earnings season, so the chances of an impending U.S. earnings season recession appear quite low. Read more about the recent earnings season in Corporate America Impresses. Lastly, we’d like to stress that pullbacks and market corrections happen and are part of long-term investing. In fact, since 1980 the average year has experienced a pullback from peak to trough of 13.7%. Even more impressive: Looking at the 29 years that stocks have been green since 1980, we see the average year had a correction of 10.9%! We will continue to monitor the impact of the coronavirus situation very closely. In the meantime, we would suggest that long-term equity investors consider staying the course and contacting their finanical professionals for specific recommendations.
Typical March Trading: Slow Start, Mid-Month Surge & Uninspiring Finish Over the recent 21 years March has been a solid performing month for the market. Average gains over the period range from a low of 1.2% by NASDAQ to a respectable 1.7% by S&P 500, Russell 1000 and Russell 2000. March has also been the #2 performing month by average performance for S&P 500 and Russell 1000 over the last 21 years. First trading day of March gains typically kick of the month, followed by choppy to slightly higher trading until around the tenth or eleventh trading day when the market tends to surge higher until around the fifteenth or sixteenth trading day. At this point the market tends to cool and can succumb to some end-of-quarter selling pressure.
Just Four S&P 500 Stocks Up This Week Thu, Feb 27, 2020 There's still another day left in the week, but unless things improve on Friday this will go down as one of the worst weeks for US equities in history. Since WWII, there have only been four other weeks where the S&P 500 was down more than 10% in a given week. On a related note, there are also only four stocks in the entire S&P 500 that are positive for the week! Leading the way higher, Regeneron (REGN) is up a healthy 7.1% while Gilead (GILD) is up just over 4%. Behind these two, the only other stocks that are higher now than they were at last Friday's close are Clorox (CLX) and CME Group (CME). On the downside, there are a lot more losers, but in the interest of space, below we have only listed the 17 stocks in the S&P 500 that are down over 20% this week alone. Looking through the names on the list, the cruise lines are well represented with Royal Caribbean (RCL), Norwegian Cruise Lines (NCLH), and Carnival (CCL). Besides these names, American Airlines (AAL) is down 26%, while Live Nation (LYV) is down 22.2%. One thing we've heard a number of people argue the last few days is that some of the weakness this week is related to the increasing likelihood that Bernie Sanders wins the Democratic nomination. If that's the case, why is not a single one of the worst-performing stocks from the Health Care sector, and why is the Health Care sector the third best performing sector this week and one of just four that is not down 10% so far this week?
Some Good News In The Face Of The Coronavirus Last week was one of the worst in the history of the stock market, with the S&P 500 Index losing more than 11%, for its worst week since October 2008. Sparking the fear and selling were concerns over COVID-19 or the coronavirus as most know it. “Markets hate uncertainty, and global investors took a sell-first-and-ask-questions-later mentality,” explained LPL Financial Senior Market Strategist Ryan Detrick. “We just don’t know how bad this will get.” While we certainly do not want to be dismissive of the tragic loss of life, amid the unnerving market volatility, there are some positives worth noting: Only two stocks in the S&P 500 finished in the green last week, and the same two are the only two currently above their 10-day moving average. This indicates a historic level of oversold conditions that suggests we may be ripe for a bounce. We just need some good news—or at least for the news to get less bad. Copper hasn’t broken beneath its levels from last fall, suggesting some potential positive economic developments under the surface. As shown in the LPL Chart of the Day, the next two months historically have been the two strongest months for the S&P 500 over the past 20 years. Last week, China and Hong Kong stock markets were the two strongest in the world. Given this is where the outbreak started, maybe some of the worst is finally being priced in. Credit markets are still calm, suggesting a very savvy part of the market isn’t yet concerned with a coming recession. The S&P 500 has pulled back 12.8% from peak-to-trough in 2020, joining 20 other years since 1980 to see at least a 10% correction during the year. The good news? Thirteen of those years managed to finish positive. Last, as bad as it was for stocks, bonds had a tremendous week, with the Barclays Aggregate Bond Index making new all-time highs and having its best week in nearly five years. Investors with a diversified portfolio will have appreciated their bond allocations for doing their job managing downside risk during these rough times.
Biggest 1-Day Dow Point Gain Ever & 1-Day Gain Since 12/26/2018 Market’s rallied back huge today. And while this is encouraging, it is a bit early to claim the correction is over. Over the past 10 days or so fear of coronavirus spreading rapidly and causing some sort of lasting global supply chain disruption and economic downturn have come at a time of elevated market valuations, seasonal February weakness and the heating up of a contentious presidential election battle. No matter how you slice it this is disconcerting for the market. But this decline has brought elevated valuations and euphoric sentiment down from the recent lofty levels and election cycle patterns remain encouraging. Heightened fear of the virus spreading rapidly here in the U.S. and elsewhere has folks reacting to the headlines. Our detailed analysis of the virus was first discussed here on January 29 and we have dug deeper in the current Almanac Investor Newsletter, including a look at corrections and market action in years there is a down January Barometer and DJIA closes below its December closing low in Q1. The table above shows the biggest one-day point gains in the Dow. You can see that today’s record point gain is not the largest percentage gain. The table below of the greatest DJIA percent gains show half the previous 24 biggest percent gains came near a significant market low. Only one came near a top in March 2000. The remaining 11 occurred in the midst of the 2002 and 2008 bear markets.
Homebuilders Appear Attractive As Rates Move Lower Tue, Mar 3, 2020 Earlier today we updated our weekly Stock Scores, which ranks each of the stocks in the S&P 1500 based on various fundamental, technical, and sentiment factors. Coincidentally on the same day that the Federal Reserve surprised with a 50 bps rate cut, one group of stocks poised to benefit from lower rates, the homebuilders, came in with very strong scores. As shown in the chart below, breaking down the S&P 1500 by the GICS Level 4 Sub-Industries, the average stock in the homebuilder sub-industry had a score of 65.9 (out of 100). That is higher than any other group with the next highest-ranked sub-industry being Heavy Electrical Equipment. Another interesting group to note is Airlines, which despite having been crushed in the coronavirus fallout, surprisingly find themselves in the top ten. The strength in Airlines is due in large part to high fundamental ratings for stocks in the group. Those high scores don't fully take into account the weaker earnings that the market is pricing in, but unlike prior periods over time, airlines as a whole are in a lot better financial shape than they were in the past. Looking at just the homebuilder stocks, Taylor Morrison Home (TMHC) boasts the highest total score this week at 81.1 thanks to strong fundamental, technical, and sentiment scores. TMHC has such a strong score this week that it also places second out of all S&P 1500 stocks. Several others have similarly strong fundamental scores, but only DR Horton (DHI) has a flawless technical score. While equities more generally have traded violently in the last two weeks, they have moved decidedly lower this afternoon, even after the FOMC cut rates. The homebuilders, however, have been the exception . Following steep declines last week, the Homebuilders ETF (ITB) fell back down to the 200-DMA for the first time in nearly a year. That level acted as support, though, as ITB bounced off that level over the past couple of sessions. This bounce has been helped further today by low rates providing a stimulus to the industry. This is as already low mortgage rates have led to housing being a bright spot for the economy. Looking ahead, the next resistance to watch for ITB would be the 50-DMA.
First Emergency Rate Cut By the Fed Since 2008 In a move in which the timing was more compelling than the decision itself, the Federal Reserve (Fed) announced this morning that it unanimously decided to cut its policy rate by 50 basis points (0.5%) from the 1.5-1.75% range to the 1-1.25% range. The surprise move marked the Fed’s first rate action outside of a regularly scheduled meeting since October 2008. As concerns over the impact of the coronavirus on global economies and markets have intensified, investors’ expectations of policy stimulus increased dramatically. “The Fed’s perspective on the evolving crisis has changed quickly,” said LPL Financial Senior Market Strategist Ryan Detrick. “Even after the emergency action, the bond market is still pricing in more cuts by July.” The surprise move was likely calibrated to increase the impact of the decision, one in which we believe would be more aptly compared to the rate cut in 1998 in response to the Russian financial crisis and failure of the hedge fund Long-Term Capital Management, rather than the recessionary cuts of 2001, 2007, and 2008. Keep in mind that before 1994, the Fed did not change policy around a meeting schedule, so effectively all rate changes were unannounced. Stocks historically sold off ahead of these moves, before getting a short-term bounce on the day of and the month following these announcements (see chart). However, performance over other periods shown has been mixed. We believe the Fed is acting out of appropriate caution to help the economy through what is likely to be an economic soft patch before a potential rebound in the second half of the year, with more room to ease if needed. The Fed’s action has helped to steepen the yield curve, or the spread between short and long-term interest rates. As shown in the next chart, the spread between 2-year and 10-year Treasury yields has risen sharply to around 30 basis points (0.3%), reversing this negative economic signal that has historically been a good predictor of recessions, though with widely varying lag times.
No Sickness In Services Wed, Mar 4, 2020 ISM's Non-Manufacturing index has now risen for three straight months for the first time since the three months ending in August of 2014. Up to 57.3, the index is at its highest level since February of last year. Likewise, the composite reading (including both the service and manufacturing indices) has now risen in back-to-back-to-back months for the first time since April 2016. The index is now at 56.5, and is healthily above the recent multiyear low of 52.9 from September. That 56.5 reading is also the highest the composite has been since February of last year. As with the Manufacturing Index which we discussed on Monday, due to the timing of the survey the full effects of the outbreaks of Covid-19 outside of China are not fully represented in this report as those occurred later in the month. But even more limited to China, just as the manufacturing report did, company comments highlighted the coronavirus as a growing concern nonetheless. From these comments, the impacts of the virus do not appear to be extremely widespread at the moment with only three industries referencing it. While Construction and Health Care industries have noted concrete effects in the form of "increased lead times for critical items" and "major back-orders" for items like masks and gloves, the mining industry failed to mention more specifically what consequences have already taken effect. For both the Manufacturing and Non-Manufacturing reports, expect mentions of the virus to be much more prevalent in the commentary section next month. Breadth in this month's report was strong with every category now sitting in expansionary territory, two of which—Backlog Orders and Inventories—were not last month. Additionally, all but three categories (Business Activity, Prices, and Import Orders) rose from one month ago. Compared to one year ago, breadth is more mixed. New Orders were a bright spot rising to 63.1 which is tied with June of 2018 for the strongest reading since July of 2015 when the New Orders index was just slightly higher at 63.4. Prior to that, you would need to go back to 2004 through 2005 when there were several months of higher readings. Additionally, the month-over-month increase of 6.9 points was the sixth-largest increase on record and the largest since a 7.6 point increase in January of 2018. While this could change in next month's report, this shows that at least prior to the coronavirus outbreaks outside of China, activity in the services sector was near historically strong levels. Backlog Orders echoed this trend. The index rose 7.7 points which was the largest month-over-month jump in Backlog Orders since May of 2018. Again, this seems to point to solid demand for the service sector. To handle this stronger demand and get ahead of future impacts from the coronavirus, businesses have also increased inventories. After falling to 46.5 last month, the lowest level since October of 2012, Inventories rose back into an expansionary level at 52.4. That was the largest increase in a single month since April of 2014. Despite this strong demand, the index for Prices Paid has continued to slide falling to 50.8. While not indicating falling prices (readings under 50), it is the weakest reading since May of 2017. While low this month, this index is yet another category that could see a quick turnaround in the coming months assuming shortages from the coronavirus leads to higher prices as is beginning to be seen with some commodities.
Jobless Claims Unfazed By Covid-19 Thu, Mar 5, 2020 While schools are closing and events are being canceled as precautions to stem the spread of the coronavirus, initial jobless claims have yet to show any negative impact. Claims actually fell slightly this week down to 216K from 219K last week. That is about in line with expectations of a 215K print. Overall, claims still point to a healthy US labor market that has not seen any significant impacts from the coronavirus. The recent multi-month low of 203K rolled off the four-week moving average this week, replaced by the higher 216K reading and caused the average to reach 213K. That is the highest level for the four week average since the week ending January 24th when it stood at 214.75K. That is also still well below the highs from late last year in the low 230K's. Non-seasonally adjusted (NSA) claims ticked higher by 18.3K this week to 217.6K. That leaves jobless claims slightly lower year-over-year and still far below the average for the current week of the year since 2000 as shown in the first chart below. Additionally, while the week to week fluctuations in the NSA number should not typically be given too much weight, we wanted to highlight that the week-over-week uptick in unadjusted claims was just about what could be expected for the current week of the year. As shown in the second chart below, the ninth week of the year has averaged an increase of 17.6K; similar to the actual change of 18.3K observed this week. In other words, before seasonal adjustment, this week's increase likely has more to do with seasonality than any coronavirus effects. While less timely given they are released at a one week lag to initial claims, continuing claims are also not showing any signs of stress from the coronavirus. It is quite the opposite actually. After showing frequent year-over-year increases over the past few months for the first time of the current economic cycle, this week marked the first back-to-back YoY declines since early September. While two weeks do not make a trend, that is a welcome improvement after the past few months.
The Bull Turns 11 The current bull market just turned 11 years old. We highlight three reasons this bull market is alive and well, and three reasons it could be on borrowed time. As the coronavirus continues to scare global markets, it would be easy forget that the current bull market started 11 years ago today. Based on investing fundamentals, we continue to believe we’ll see a resumption of economic growth and a continuation of this bull market into at least 2021, but worries are building. We highlight three reasons this bull market is alive and well, and three reasons it could be on borrowed time. Three reasons the bull may make it to 12 As shown in FIGURE 1, currently this is the longest bull market on record, recently peaking at more than a 400% gain, but it still hasn’t topped the 419% advance from the 1990s bull market. We believe this bull market may eventually become the greatest bull ever, and we offer three reasons why we think this may be so. Attractive valuations. One positive about the recent market weakness has been that stocks are now less expensive. The forward price-to-earnings (P/E) ratio for the S&P 500 Index recently dropped about 2 points from a multi-year high of 19 to 17. Considering the historically low interest rates and continued low inflation, we find stocks to be quite attractive for suitable investors at this point. Additionally, S&P 500 stocks are near their most attractive valuations ever relative to US Treasuries, based on the equity risk premium (ERP). ERP compares the earnings yield on equities (or company profitability as a percent of share price) to the 10-year Treasury yield. Comparing the current S&P 500 earnings yield of 5.9% with the 10-year Treasury yield of 1% gives us an ERP of 4.9%. The long-term ERP average is 0.72%, suggesting stocks are extremely cheap relative to bonds. In other words, the earnings (or income) stock prices have been producing have been greater than those of bonds. A healthy US consumer. In the face of scary headlines, the strength of the US consumer has remained quite impressive. Consumer spending makes up nearly 70% of gross domestic product (GDP) currently, so a healthy consumer would be necessary to keep this record-long cycle going. Although we expect economic data may weaken in the coming months as coronavirus concerns grow, a full-employment backdrop, as evidenced by the strong jobs report March 6, coupled with healthy consumer confidence may help the United States weather a possible coming storm. Additionally, the economy has been on a clear upswing the past few months, as highlighted by the Institute for Supply Management (ISM) non-manufacturing activity index jumping to a fresh new yearly high in February. The services sector makes up about two-thirds of US economic activity, and the report showed the impact of the coronavirus has been minimal in that sector thus far. But will American consumers go to the movies, out to dinner, or travel if the virus continues to spread in our country? That’s the big question—but the US consumer has been counted out before and has always been resilient. Divided government. The US presidential election has many investors wondering what the outcome could mean for their portfolios. The truth is, we’ve experienced bull markets and bear markets under both Democratic and Republican presidents. We would instead focus on the makeup of Congress, which we expect to still be split into two parties after the election in November. When Congress has been split, the S&P 500 historically has returned an average of 15.9% under a Democratic president and 17.9% under a Republican president. If this scenario plays out in November as we expect, it may be another feather in the bull’s cap. Three reasons the bull may not make it to 12 Here we offer are three reasons why we think this bull market may not make it through another year: The coronavirus. The spreading epidemic has put a halt to the Chinese economy, and we anticipate other countries may see similar slowdowns in the coming months. Although our base case is the virus eventually may be contained and growth may accelerate in the second half of the year, if things were to get much worse, a new bear market may be entirely possible. Based on what we know now, we estimate that the outbreak may trim roughly 0.25–0.5% from US GDP over the next couple of months due to global supply chain disruptions, falling export demand, and decreased tourism. On top of that, lower stock prices may hit consumer confidence and create a negative wealth effect. We still believe our 1.75% US GDP growth forecast for 2020 may be achievable, but our latest global GDP growth forecast of 3.5%, as noted in our Outlook 2020 publication, may be too high, considering the recent economic hits from China, South Korea, Japan, and Italy. The reality is we simply don’t know the eventual impact of the coronavirus on the markets and economy, and that uncertainty could be what may spark an eventual bear market. Stocks down in January and February. Could the stock market be sending a major warning sign in early 2020? Historically, when the S&P 500 has been lower the first two months of the year, like it has been in 2020, future returns have been tepid. Since 1950, when the S&P 500 has been lower the first two months of the year, the final 10 months of the year have been up only 2.3% on average, while the full year has been 4.9% lower on average. Compare that to when the first two months have been positive, the final 10 months have been up 12.2% on average, and the full year has been up 19.8% on average. Some of the worst years for stocks were years in which these first two months were in the red, including 1974, 2000, 2002, and 2008. Of course this by itself isn’t a reason to expect a bear market, but it is worth paying attention to going forward. You can read more about this potential warning sign in the March 4 LPL Research blog. This bull market can’t go forever. Eleven years is a long time for a bull market to run. One final reason to expect this current bull market to end is the simple fact that it has to end eventually. Although fundamentals suggest the bull market can make it to 12 years, a 20% correction at some point in the next year after a 400% gain wouldn’t be overly surprising. As a reminder, in both 2011 and 2018, stocks barely missed being down 20% before rebounding back to eventual new highs. Additionally, after the recent market sell-off, the S&P 500 has been trading near levels similar to where it was back in early 2018. While this might feel like an invincible bull market, it has had many scares along the way.
