Strongest Earnings Beat Rate Since Q3 2006 Feb 22, 2018 Yesterday we sent Bespoke members a full rundown of results from the just-completed earnings season. One stat we can highlight here is the earnings beat rate from this season. As shown below, the percentage of companies that reported EPS that were stronger than consensus analyst estimates came in at 69%. For those keeping score, that’s the strongest beat rate since Q3 2006, and the sixth strongest beat rate over the last 20 years. You might remember that analysts were hiking their EPS estimates at a record pace heading into the most recent earnings season, which makes the extremely strong beat rate (relative to recent earnings seasons) even more impressive.
March Madness Posted by lplresearch Well, it had to end eventually. The S&P 500 Index is set to close lower on a total return basis for the first time in a record 15 months. “February finally cracked the volatility genie out of the bottle, and now the big question is: will he stay out for good? The good news is that March kicks off two of the strongest months historically for equities, before we hit a period of seasonal weakness from May through October,” according to Ryan Detrick, Senior Market Strategist. Here are some stats to chew on for the S&P 500 as we enter March: March was the only month to close in the red on a price basis last year (down 0.04%). During a mid-election year, March has been down only once in eight instances since the mid-‘80s, and that was in 1994. Over the past 10 and 20 years, March has ranked as the second best month on average, at 2.4% and 2.1%, respectively; since 1950 it has been up 1.2% on average, which ranks fourth.* Not to be outdone, April has historically been even stronger in two of the three periods, as the chart below shows. Since 1950, when March has begun the month above its 200-day moving average, the average return has slightly improved to 1.3%. Over the past 20 years, when March has finished in positive territory, the returns have been quite strong—with a return of 4.1% on average. Only October sports a better return when positive. With several potentially market-moving events coming up in March, could 2018 be different from previous years? For more on the big events to be on the lookout for next month, and what they could mean for the markets, check out Market Madness for Central Banks.
After a Wild Ride, Market Still Above Average for a Midterm Year Even after experiencing their first 10% corrections since early 2016, DJIA and S&P 500 have rebounded and are currently trading above historical levels for this time of a midterm-election year. As of yesterday’s close, DJIA was up 2.8% year-to-date and S&P 500 was up 2.6%. This is well below their highs reached in January, but still better than historical averages of 0.8% (DJIA) and 0.7% (S&P 500) of past midterm years on the second to last trading day of February. Compared to past Midterm years, 1st Elected 2nd Years and Years Ending in “8”, this year diverged significantly in January and then quickly reverted in February. A choppy pattern does appear in the historical data however the magnitude is much less than experienced so far in 2018. The trend of the three historical patterns presented is higher from now until mid-April. The path is not a straight line as some weakness does appear in the second half of March. After mid-April, historical patterns deviate greatly with past Years Ending in “8” delivering the greatest full-year returns.
Where Does This Bull Market Rank? Posted by lplresearch We shared the following chart in our latest Weekly Market Commentary, “The Bull Is 9, Can It Make 10?”, which shows that this is the second largest and second longest bull market ever—with only the ‘90s bull standing in the way of the record books. To break things down a bit more, here are all of the bull markets since World War II: “We think the bull market can break the all-time record for the longest ever. With strong corporate profits, decade highs in manufacturing and services, and 40-year-plus lows in initial unemployment claims, we simply aren’t seeing recessionary indicators to suggest that the bull is coming to its end,” suggested Ryan Detrick, Senior Market Strategist.
March Options Expiration Week Generally Bullish Stock options, index options, index futures, and single-stock/ETF futures all expire at the same time four times each year, March, June, September and December. This event is often referred to as Quadruple Witching or as we prefer to call it in the Stock Trader’s Almanac (page 78), Triple Witching. March’s option expiration week performance is second only to December’s and has a bullish bias. DJIA and S&P 500 have recorded weekly gains in better than twice the number of weeks as declines. NASDAQ’s track record since 1983 is slightly softer with 22 advances and 13 declines, but all three indices have logged gains in options expiration week in nine of the last ten years. However, the week after is bearish for DJIA, S&P 500 and NASDAQ. S&P 500 is weakest, down six years straight.
Worst of Midterm Year 2018 Could Already Be Over Anyone familiar with the annual Stock Trader’s Almanac and this blog is most likely familiar with the above chart depicting the seasonal pattern of S&P 500 in midterm election years since 1950. Midterm years, like 2018, have a poor reputation largely due to their weak performance. However, we like to refer to midterm as the “Bottom Pickers Paradise” (page 30 of STA 2018) due to the buying opportunities this weakness offers. Over the last 17 midterm years, S&P 500 has declined an average 16.90% sometime during the year. The biggest decline was 37.6% in 1974 and the smallest was 4.36% in 1958. Once the decline ended, S&P 500 was higher 1-, 3-, 6- and 12-months later 100% of the time. The average gain from the end of the midterm year decline to one year later was 32.29%. Was February 8 the end of this midterm year’s decline? Based solely upon historical data, it could be. S&P 500 declined 10.16% in 13 calendar days this year already. Although below historical averages it is not that far from magnitude and/or duration of declines in 1954, 1958, 1986, 2006 and 2014. For this scenario to become reality, S&P 500 would need to close at a new all-time high and not decline greater than 10.16% for the remainder of the year. NASDAQ’s new highs earlier this week and last have proven fleeting. Another (and increasingly more likely) scenario for S&P 500 in 2018 would be to rally up to and stall just below its January closing highs before retreating to test and possible violate its February lows sometime during the Worst Six Months (May to October) which would then create the perennial midterm buying opportunity.
Midterm Election Year Low Bottom Pickers Paradise With the Ides of March behind us now and market volatility heating up, it’s prudent to remember that this type of market action is normal at this time of the year and during midterm election years. American presidents have danced the Quadrennial Quadrille over the past two centuries. Normally, major corrections occur sometime in the first or second years following presidential elections. In the last 14 quadrennial cycles since 1961, 9 of the 17 bear markets bottomed in the midterm year. After the midterm congressional election and the invariable seat loss by the president’s party, the president during the next two years jiggles fiscal policies to get federal spending, disposable income and social security benefits up and the economy firing on all pistons. By Election Day, the president hope to have danced his their way into the wallets and hearts of the electorate and, hopefully, will have choreographed four more years in the White House for their party. Since 1914 the Dow has gained 47.4% on average from its midterm election year low to its subsequent high in the following pre-election year. A swing of such magnitude is equivalent to a move from 20,000 to 30,000 or from the current Midterm low of 23860 to 35790. In the table below of the gains from the Midterm Low to the Pre-Election Year highs since the establishment of the Federal Reserve in 1913 we have highlighted the concentration of six (6) January and four (4) October Midterm lows and nine (9) December Pre-Election Year highs. For additional perspective, here are the average annual gains by year of the 4-Year Presidential Election Cycle for the Dow and their Yearly Seasonal Patterns since 1949 for the S&P 500. Note the pronounced Worst Six Months decline in the Midterm Year.
From Midterm Low NASDAQ Can Reach Nirvana Yesterday we detailed how the Dow has gained nearly 50% from its midterm low to its pre-election year high and how the S&P 500 worst six months are more pronounced in the midterm year. Today’s focus is on how NASDAQ often reaches near market nirvana from its midterm low to its pre-election year high. Since 1974 NASDAQ has gained 70.2% on average from its midterm election year low to its subsequent high in the following pre-election year. A swing of such magnitude is equivalent to a move from 5,000 to 8,500 or from the current Midterm low of 6,777 to 11,520. In the table below of the gains from the Midterm Low to the Pre-Election Year highs since NASDAQ was created in 1971 we have highlighted the concentration of four (4) October Midterm lows and four (4) December Pre-Election Year highs. For additional perspective, here are the average annual gains by year of the 4-Year Presidential Election Cycle for NASDAQ and its Yearly Seasonal Patterns since 1971. Note the even more pronounced Worst Six Months decline in the Midterm Year for NASDAQ.
Why Stocks Like Higher Rates Posted by lplresearch After the Federal Reserve hiked rates for the sixth time this cycle and left the door wide open for at least another two hikes this year and three to four more in 2019, higher rates are likely coming. The 10-year Treasury yield continues to consolidate beneath the 3% level, near four-year highs. What does it mean for equities if rates and yields do indeed go higher? Fortunately, to the surprise of many, stocks historically do very well when rates increase. One of the bigger conundrums we have seen during this recent cycle of higher rates is how both stocks and rates can trend higher at the same time. As we illustrated in a recent Weekly Market Commentary, bond yields and stocks tend to trade together until the 10-year Treasury yield gets up around 5%. “Going back to the early 1960s shows that when the 10-year Treasury yield goes higher, stocks tend to follow along. In fact, out of 23 periods of rising rates, the S&P 500 Index gained 19 of those times. Things were even more pronounced recently. Since 1996, stocks gained all 11 times we saw higher rates,” according to Ryan Detrick, Senior Market Strategist. Not to be outdone, the current period of higher rates began in September 2017 and the S&P 500 is up another 11% since then. History suggests higher rates may be a good thing and should the 10-year Treasury yield break about the critical 3% area, this could be further support for the bull market.
Instead of End-Of-Q1 Weakness, Perhaps a Bounce Over the past 28 years the DJIA has declined 18 times and advanced 10 with an average loss of 0.77% near the end of March. S&P 500 has a similar track record. Excluding advancing years, the average decline is right around 1.6% for DJIA and S&P 500. End-of-quarter portfolio restructuring likely plays a role as managers lock in any gains and establish positions for the next quarter. These declines can begin on either the fourth-to-last trading day or the third. However, coming into this stretch with March down month-to-date as it is this year has mitigated losses on several occasions. Of the 8 times DJIA was down MTD in March since 1990 month-end was up 5 times. For the S&P, the 8 down MTDs were also followed by 5 gains.
Stocks Bounced, As Expected Posted by lplresearch This is the fourth time since Brexit that stocks bounced right off of this long-term trendline. Is it possible that this instance will be a buying opportunity for suitable investors like the other three periods were? One thing is for sure: the trade war concerns could prove to be an opportunity when all is said and done. What would it mean if the 200-day MA was finally breached? “This is now the fourth-longest streak above the 200-day moving average since World War II,” said Ryan Detrick, Senior Market Strategist. “The reality is that historically once long streaks finally end, the bullish momentum may be far from over, and more gains could be in store for stocks.” As the figure below shows, a year after the previous four-longest streaks ended, stocks were in the green. In other words, when this bullish streak ends (and it will eventually), the bull could still have some tricks up his sleeve.
Time for April Showers? Posted by lplresearch As the saying goes, “April showers bring May flowers.” But that begs the question: Will it rain on the bulls this April? First things first, the S&P 500 Index found support right on its upward trending 200-day moving average. That’s a step in the right direction for markets looking to form some type of bottom. But bottoms don’t form overnight, and they can be a frustrating process. In fact, in August 2015 (the last time we saw volatility similar to the recent action), the ultimate low took nearly six months to form. However, there may be some good news. April is a month that rarely sees a large dip. In fact, according to Ryan Detrick, Senior Market Strategist, “April has only showered gains lately, as the S&P 500 has posted positive returns in 9 of the past 10 years”. As we described in this Weekly Market Commentary, we believe that positive U.S. economic growth and strong earnings should outweigh trade policy and midterm election concerns. In the end, we still expect double-digit S&P 500 returns in 2018 with cyclicals outperforming defensive, value outperforming growth, and small caps outperforming large caps. First Trading Day of Q2 DJIA and S&P 500 Advance 75.0% of the Time According to the Stock Trader’s Almanac 2018, the first trading day of April is DJIA’s second best first trading day of months based upon total points gained. Only May’s first trading day is stronger. Looking back at the last 24 years, in the tables below, we can see DJIA and S&P 500 have both advanced 75.0% of the time (up 18 of last 24) with average gains right around 0.5%. NASDAQ and Russell 2000 have slightly weaker track records and smaller average gains, but are both still up more frequently then down with modest average gains.
Up Twelve in a Row, But Softer in Midterm Years April marks the end of our “Best Six Months” for DJIA and the S&P 500. On April 2, we will begin looking for our seasonal MACD sell signal and corresponding early signs of seasonal weakness. The “Worst Months” have been more pronounced in past midterm years. April 1999 was the first month to gain 1000 DJIA points. However, from 2000 to 2005, “Tax” month was hit, declining in four of six years. Since 2006, April has been up twelve years in a row with an average gain of 2.5% to reclaim its position as the best DJIA month since 1950. April is third best for S&P (since 1950) and fourth best for NASDAQ (since 1971). The first half of April used to outperform the second half but since 1994 that has no longer been the case. The effect of April 15 Tax Deadline appears to be diminished. Traders and investors are clearly focused on first quarter earnings during April. Exceptional Q1 earnings and positive surprises tend to be anticipated with stocks and the market moving up in advance of the announcements and consolidating or correcting afterwards. Typical midterm-election year woes do temper April’s performance since 1950. April is DJIA’s and S&P 500’s seventh best month in midterm-election years, up 11 of the last 17. For NASDAQ, Russell 1000 and Russell 2000, April is the sixth best month in midterm years.
April’s Trading Pattern: Bulk of Gains Typically Materialize in Second Half As of today’s close, the third trading day of April, DJIA is up 0.7%. S&P 500, Russell 1000 and Russell 2000 are also higher by 0.1%. Even after today’s solid 1.45% gain, NASDAQ is still down 0.3%. Compared to April’s average performance over the last 21-years, DJIA is the only index in line with historical performance while S&P 500, NASDAQ, Russell 1000 and Russell 2000 are all lagging. Looking ahead, sideways and choppy trading are likely from now until around mid-month. At which point, earnings season is generally underway and results and guidance typically propel stocks higher into month’s end.
How Can Charlie Brown Help Investors? Posted by lplresearch “In the book of life, the answers aren’t in the back.” Charlie Brown Markets are not easy to navigate, as fear and greed can often get in the way of prudent investment decisions. As much as we would like a script to follow, it isn’t that simple. Much like the quote from Charlie Brown on life, there is no clear answer as to how markets will bottom. “You can have V-bottoms, W-bottoms, or U-bottoms, for instance; but it appears more likely that this particular bottom may look like a Charlie Brown shirt instead of a letter of the alphabet,” exclaimed Ryan Detrick, Senior Market Strategist. As far as a potential market bottom is concerned, the chart of the day illustrates our belief that we appear to be beyond the alphabet and into Charlie Brown territory: The last time we saw Charlie Brown-esque volatility like this was in August 2015, and the S&P 500 Index didn’t bottom until February 2016—nearly six months later. The good news is the economic backdrop is much better now than it was then, so we do not expect another four months to pass before the lows are established.
Should You Sell In May? Posted by lplresearch One of the most popular investment sayings is about to take over the airwaves: “Sell in May and Go Away.” The reason for the concern is that the upcoming six months (from May until the end of October) has historically been the weakest six-month stretch of the year, as our LPL Chart of the Day shows: It doesn’t end there though, as midterm years tend to exacerbate the weak performance during these six months. In fact, out of the four-year presidential cycle, the next six months have been typically up only slightly on average and higher about a coin flip of the time (53%). But should you sell in May this year? Maybe not, and here’s why: “If you subscribe to the old axiom, you should also note that the next six months (November 2018 through April 2019) have been the best performing six-month stretch of the presidential cycle. In fact, during five of the past six years, the S&P 500 Index actually gained during the ‘Sell in May’ period—not to mention May has been higher in each of the past five years,” explained Ryan Detrick, Senior Market Strategist. Detrick also noted that “we should not ignore the weak seasonal period ahead, but we should be aware that this investment mantra to sell stocks isn’t gospel. Focusing on modest valuations, impressive earnings, and a very positive technical and sentiment backdrop may be more helpful, as all suggest using any pullbacks as an opportunity for suitable investors to add to equity positions during this potentially tricky period.”
Another Near Record Posted by lplresearch As the calendar turns to May, it also means the current economic expansion is now 107 months old, officially marking the second-longest since World War II (WWII). As our LPL Chart of the Day shows, only the 120-month expansion of the 1990s stands in the way of the record. “Can the current expansion go another 14 months to break the record for the longest economic expansion?” asked Ryan Detrick, Senior Market Strategist. “Considering bull markets don’t die of old age, but instead die of excesses like overspending, overleverage and overconfidence, we think there’s a good chance this cycle can go at least another year, as we simply aren’t seeing signs of excesses from previous economic peaks.” The next six months could be tricky for equities, but we think the lack of excesses in the U.S. economy is one important reason why this year may be (another) one in which staying invested could be better than sitting on the sidelines—topics that we’ll cover in more detail in this week’s Weekly Market Commentary, due out later today.
Some Good News Posted by lplresearch The S&P 500 Index closed at its highest level since March 16 yesterday and is now up 1.85% for the year. But, what’s the significance? Well, since 1970, when the S&P 500 has closed higher year-to-date (on any day) during the month of May, the index’s total return for the full year has been positive in every instance except one. That means 35 out of 36 previous years have lead to a higher full-year return. (The year 1990 being the only exception.) What about the “Sell in May” period? As we discussed in this week’s Weekly Market Commentary, the next six months are historically the weakest of the year, but we think this year might buck that trend and provide opportunity, as it has in five of the past six years. Well, here’s one more reason why, going back to 1950,* when the S&P 500 has a single positive year to date day during the month of May we found that those worst six months of the year return +3.8% on average and are higher 72.5% of the time, both well above the average May through October period. Good news indeed. “The illusion to the whole ‘sell in May’ meme is that the next six months are always weak. However, that simply isn’t true; and what matters more is if markets are strong heading into these six months, returns can actually be quite strong,” explained Ryan Detrick, Senior Market Strategist. Lastly, here is one final look at “Sell in May.” As our LPL Chart of the Day shows, when the S&P 500 was up the previous six months heading into the worst six months of the year, is above its 200-day moving average, and it is a midterm year, the returns have been quite strong. In fact, historically the average pullback during the next six months under those criteria is 10.3%, but the average gain when all is said and done is +5.5%. Given 2018 fits all of those criteria, this is another reason to think investors could be rewarded for not selling in May, or even adding on any weakness.
