Midterm Seasonal Pattern Update: Years Ending in 8 Possibly in Play Today’s modest 0.25% DJIA gain was sufficient to return DJIA to positive year-to-date performance. S&P 500 is currently up 1.82% year-to-date. Based upon historical performance in past midterm years, DJIA is currently slightly below average and S&P 500 is modestly above average. Although May started off poorly, DJIA and S&P 500 have been in rally mode for most of the month which is similar to the average performance recorded by past years ending in 8. If DJIA and S&P 500 are breaking away from typical midterm-year performance, the second half of May could be weaker than the first half followed by a stronger June.
Yanny or Recession? Posted by lplresearch So what do you hear? Are you Team Yanny or Team Laurel? In case you haven’t heard, some people hear the word “Yanny,” while others hear the word Laurel in this epic division. Take a listen here and see what you hear. In the end, it comes down to how high or low of a frequency your ears can pick up. Scientists claim that most “younger ears” will hear Yanny, while “older ears” will hear Laurel. “Much like people hear the words Yanny or Laurel, it is amazing that we all look at the same economic data and come to wildly different conclusions regarding how soon a recession is coming,” explained Ryan Detrick, LPL Research Senior Market Strategist. Many economists are worried about the Federal Reserve (Fed) hiking rates, peak earnings profits, the yield curve flattening, bond yields popping, and crude oil up significantly over the past year. With this being the second-longest economic recovery since WWII, are we really in the ninth inning of the rally? “Although I hear Laurel, I also hear a very strong economy. One with expanding global corporate profits, low inflation, a record-high Leading Economic Index (LEI), fiscal stimulus still coming, and broad-based market participation. We see very little chance of a recession over the next 12-18 months,” according to Detrick. Here’s the catch: even if you know a recession is coming, would it matter? As our LPL Chart of the Day shows, looking at the last 10 recessions dating back to the 1950s*, we found the S&P 500 Index was actually higher during the recession seven times! Additionally, the max pullback during a recession came in at an average of only 17.6%, and a year after the recession ended, stocks were higher nine out of 10 times. Economic indicators continue to look strong, and we expect double-digit stock returns when all is said and done in 2018**. We’ll worry about a recession when we start seeing the warning signs pile up. Even then, our view is that long-term investors shouldn’t panic over any potential recession-based corrections and may consider using the weakness as an opportunity.
Memorial Day Trading: Bullish Day After In the Stock Trader’s Almanac we show how the days after Memorial Day have been rather bullish. Improved performance since 1986 is also highlighted. Some of this bullishness after Memorial Day can be attributed to the strength of the first two days of June (in many years). NASDAQ exhibits a similar pattern to S&P 500 over the same time periods.
Happy Birthday, Expansion! You Don’t Look at Day Over 9 Posted by lplresearch This month, the U.S. economic expansion officially turns nine years old. Last month, it topped what was the second-longest expansion in the 1960s, with only the record 10-year expansion from the 1990s standing in the way. For starters, consider that going clear back to the Civil War, the United States has never gone a full decade without a recession (the 1990s expansion straddled the century mark). Is there a chance this could be both the first decade to go without a recession and set the streak for the longest expansion? We like the odds. As LPL Research Senior Market Strategist Ryan Detrick explained, “Here’s the catch: Bull markets don’t die of old age; they die of excesses. We aren’t even seeing wage growth over 3% yet, and overall inflation remains tame. In our view, this economic recovery could have at least a few years left thanks to strong corporate profits, continued growth in the services and manufacturing sectors, and a tailwind from fiscal policy.” Our LPL Chart of the Day shows that this is now the second-longest economic expansion on record, but the economic growth seen during this expansion leaves plenty to be desired.
Summer Slump or Summer Sizzle? Posted by lplresearch If all you saw were the headlines you might think that “trade wars” or “a flattening yield curve” was pushing equities to the brink of a new bear market as the U.S. economy teetered on recession. However, the data suggest the U.S. economy remains strong and the S&P 500 Index is sitting comfortably in positive territory year to date, having jumped nearly 5% since the start of the “sell in May and go away” period. “With today being the first official day of summer, can this surprise summer rally continue?” asked LPL Research Senior Market Strategist Ryan Detrick. “We think it can. When you have small caps, high-beta stocks, recent initial public offerings (IPO), and technology all leading – that isn’t the hallmark of a looming bear market. Not to mention the tailwinds of fiscal policy are still primed to support economic growth for the rest of this year and likely well into 2019; and possibly beyond.” Yes, the list of worries is long and well known: market sentiment may becoming quite optimistic, industrials are lagging, the yield curve is flattening, trade issues continue, and emerging markets are flashing potential issues, but we believe the positives outweigh the negatives and continue to expect double-digit equity returns when all is said and done in 2018*. That said, the S&P 500 Index has finished within 0.5% of the prior session’s close for the last 10 trading days, the longest streak this year; which suggests the coil is tightening and more volatility is likely coming. But as the LPL Chart of the Day shows, when the S&P 500 has been up 3% or more heading into the start of summer** (like 2018), the full year has been positive an incredible 35 out of 35 times. Not to mention the rest of the year has actually been stronger than the average year. That should comfort investors, regardless of the headlines.
Small Cap Streak Continues Posted by lplresearch “We’re going streaking.” -Frank “The Tank” Ricard from Old School The Russell 2000 Index closed higher for the eighth consecutive week last week, its longest win streak since late 2013. In fact, it hasn’t made it to nine consecutive green weeks since 1996—so this type of persistent strength is unusual. What does it mean, you ask? For starters, it means continued equity strength is quite likely if history is a guide. “Although it is quite rare to see small caps up eight straight weeks, continued gains are perfectly normal. In fact, the S&P 500 Index has been higher six months after this rare streak in each of the past nine times. Near-term, things are stretched, but the bigger picture suggests more equity gains over the rest of the year are possible,” according to LPL Research Senior Market Strategist Ryan Detrick. As our LPL Chart of the Day shows, stocks could consolidate some over the near term, but solid returns through year-end have been quite common. For the rest of 2018, we continue to like stocks over bonds, small caps over large caps, value over growth, and emerging markets and U.S. stocks over foreign developed equities.
S&P 500 has advanced 85.7% of the time on July’s First Trading Day July’s first trading day is the second best performing first trading day of all twelve months with DJIA gaining a cumulative 1139.97 points since 1998. Over the past 21 years, DJIA’s first trading day of July has produced gains 81.0% of the time with an average gain of 0.44%. S&P 500 has advanced 85.7% of the time (average gain 0.42%). NASDAQ has been slightly weaker at 71.4% (0.21% average gain). No other day of the year exhibits this amount of across-the-board strength which makes a solid case for declaring the first trading day of July the most bullish day of the year over the past 21 years.
What Does an Inverted Yield Curve Mean? Posted by lplresearch As the yield curve continues to flatten, investors remain worried about the potential implications for the economy and markets. Why? Inverted yield curves have a perfect history of predicting economic recessions over the past 50 years, with nine of the past nine inversions followed by an eventual recession. The yield curve is a graphical representation of bond yields of similar credit quality across a range of maturities. A flattening curve, when shorter-term rates rise more quickly than longer-term rates (or fall more slowly), is often perceived as an indication that slower economic growth lies ahead. An inverted yield curve, where short-term rates are higher than long-term rates, has historically been a precursor to a recession. Last week, the difference between the 2- and 10-year Treasury yields was beneath 0.30%, marking the flattest level since ahead of the financial crisis more than 10 years ago. Here’s the catch: the yield curve isn’t inverted, and we’ve seen periods with a relatively flat yield curve that have lasted years before a recession (the mid-to-late 1990s for instance). With strong corporate profits, high confidence levels, and the benefits from fiscal policy still being felt, we do not anticipate a recession over the next 12-18 months. But what happens when the yield curve inverts? As our LPL Chart of the Day shows, even inverted yield curves don’t always equal near-term trouble for equities. According to LPL Research Senior Market Strategist, Ryan Detrick, “Here’s what you need to know: an inverted yield curve isn’t this end-all sell signal that many make it out to be. In fact, looking at the past five recessions, economic growth continued to accelerate for an average of 21 months after the yield curve inverted, and the S&P 500 Index added nearly 13% on average—rising in every instance—before a recession officially started. We aren’t ignoring this potentially troublesome sign, but it doesn’t appear to be the major warning many make it out to be.”
Stocks’ Summer Strength Points to More Gains Posted by lplresearch The S&P 500 Index is on a three-month winning streak, and more gains may be in store for bulls. As shown in our LPL Chart of the Day, in the last 15 instances when the S&P 500 has closed higher in April, May, and June (like 2018 just did), all but one of those years saw unusually strong returns in the second half. In fact, in those 15 years, the S&P 500 returned 10.6% on average from July to December. The chart also illustrates that weakness in July following a strong second quarter doesn’t necessarily portend the remainder of the year; and, with the index up roughly 3% on the month so far, note that third quarter and full-year returns were positive in every instance where July finished in the green. “Summer can be a tenuous time for stocks,” according to LPL Research Senior Market Strategist Ryan Detrick. “However, when the S&P 500 gained in April, May and June, it has usually been a sign that stocks had enough momentum to continue higher in the second half.” Interestingly, four of the 15 instances have occurred in the current bull market, which began in March 2009. While stocks have benefitted from global accommodative monetary policy over the past several years, we anticipate robust (20%) corporate earnings growth and tailwinds from tax reform and government spending to help equities continue the second-half trend we’ve seen in these scenarios, even as the Federal Reserve further tightens monetary policy. As we mentioned in the Midyear Outlook 2018: The Plot Thickens, we expect the S&P 500 to end 2018 in the 2900-3000 range, based on an estimated aggregate Earnings Per Share of $155 per share and a price-to-earnings ratio of 19. If the S&P 500 ends in the midpoint of our range, it will have gained 10% on the year.
Second Quarter GDP Preview: Fiscal Stimulus May Fuel Strongest Growth Since 2014 After a seasonally weak first quarter, expectations have been ramping up for the U.S. economy. The first look at real gross domestic product (GDP) for the second quarter will be released on Friday, July 27, and according to consensus expectations, it could be the strongest reading since 2014. We agree that the stage is set for a strong second quarter GDP report. As shown in our LPL Chart of the Day, the U.S. economy last quarter likely benefited from a potent mix of accommodative fiscal policy, the solid macroeconomic backdrop, and a narrowing trade deficit amid a glut of exports. “The benefits of fiscal stimulus on consumer and business spending, combined with a tailwind from exports, should contribute to a strong second quarter GDP print,” according to John Lynch, LPL Research’s Chief Investment Strategist. “We expect fiscal stimulus to prevail over tariffs and oil prices this year, boosting U.S. economic growth to up to 3%.” Consumer spending, which accounts for about 70% of the economy, has improved in the second quarter after weak first quarter reports. Business spending has been accelerating since an oil-related slowdown in 2015 and early 2016, and posted some of its strongest growth in the cycle in the first quarter. U.S. exports have also increased significantly due to higher demand ahead of tariffs, which has closed the trade deficit to its smallest gap since 2016. The Atlanta Federal Reserve’s NowCast model estimates that net exports may account for 0.7% of their 4.5% GDP growth forecast for the second quarter, which would be its strongest contribution since 2013 if realized. However, the positive impact on GDP from the increase in exports may just be borrowing growth from future quarters. We estimate that tariffs would cause a 0.1% to 0.2% drag on GDP annually if they do not extend meaningfully beyond concrete proposals. As we noted in our Midyear Outlook 2018 publication, we expect U.S. GDP growth of up to 3% in 2018. Year-over-year GDP growth was 2.8% in the first quarter, so our target range implies a modest lift from current levels. We expect that the benefits of fiscal stimulus may outweigh any negative implications of tariffs and the economy should be able to maintain a solid growth trajectory over the remainder of the year.
Hot July Market Blazes Past Historical Performance As of today’s close DJIA is up 3.18% thus far in July. S&P 500 is slightly better at 3.26% while Russell 2000 is up 3.37%. NASDAQ is best up 4.41% with another six trading sessions to go in the month. As you can see in the above chart this is well above average historical July performance at this point of the month over the last 21 years. Early month strength (trading days three, four and five) was substantially greater this year while weakness around trading days six and seven was also more pronounced. Mid-month strength was similar in magnitude (trading days eight through twelve/thirteen) and thus far the market has avoided any meaningful weakness in the second half of the month. In today’s mixed trading session DJIA did finish lower by 13.83 points. This decline with Friday’s 6.38 DJIA point decline is sufficient to satisfy our criteria for a Down Friday/Down Monday Warning (DF/DM). In recent bull market years, subsequent declines have been mild and/or brief. The actual decline on Friday and Monday was small, so if DJIA quickly recovers, then today’s warning could have little or no consequences however, if DJIA’s struggles persist it could easily surrender its July gains before the month ends.
Sentiment Down, But Holding Up Relatively Well Aug 2, 2018 Between Facebook’s (FB) record plunge last week and some other high profile weakness in former leading stocks, we would have thought that individual investor sentiment would have taken a big turn for the worse this week. While bullish sentiment did decline, the drop was smaller than we were expecting. According to the weekly sentiment survey from the American Association of Individual Investors (AAII), bullish sentiment dropped from 31.52% down to 29.11%, which is actually smaller than the declines we saw in each of the prior two weeks when equities were doing better! Although bullish sentiment saw just a small decline, bearish sentiment saw its largest one-week increase since the end of June, rising from 26.9% up to 32.1%. Still, that’s hardly a level that indicates much in the way of worry. Most of this week’s new bulls came from off the fence, as neutral sentiment declined from 41.58% down to 38.81%. Jobless Claims Making New Records Aug 2, 2018 Jobless claims came in lower than expected this week with the seasonally adjusted headline reading rising by 1K to 218K compared to consensus forecasts of 220K. While it wasn’t a big ‘beat’ relative to expectations, let’s just put the string of recent low readings into perspective. This week was the 178th straight week of sub 300K claims (a record), the 43rd straight week at or below 250K (longest streak since 1970), and the fourth straight week of readings at or below 220K (longest streak since 1969). This week’s low reading in claims brought the four-week moving average close to a new cycle low this week as well. At 214.5k, the average is now within just 1K of a new cycle low. However, in order to break that prior low from May, we would need to see a reading next week below 211K (assuming no revisions). It’s possible, but it will be tough. Finally, the non-seasonally adjusted (NSA) reading of claims also declined this week to its lowest level for the month of July on record. At 179.5K, it’s also over 117K below the average of 297K for the current week of the year dating back to 2000.
NASDAQ’s Relentless March Higher Continues As of today’s close, DJIA is up 3.17% year-to-date. S&P 500 is doing twice as well up 6.61% and NASDAQ is more than double S&P 500’s advance at 13.85%. These numbers confirm DJIA’s laggard performance and the chart above clearly shows it is the furthest from its all-time closing high, time since as well as price. S&P 500 is quickly nearly its old all-time high while NASDAQ is doing the same. Based upon historical average performance in midterm years and in all years, NASDAQ and S&P 500 are above average for this time of the year. DJIA is doing better than past midterm years, but is still below average compared to all years.
What Happened to Sell in May? The S&P 500 Index is up approximately 8% since May when we were bombarded with warnings to “Sell in May and Go Away.” Remember, the worst six months of the year historically have taken place from May through October, while the other six months are the best. As we noted at the time though (in our Weekly Market Commentary) there were many clues that suggested selling stocks in May and waiting until October to move back into equities may not work in 2018. There is still plenty of time for some usual pre-midterm election year volatility, but the reality is the bull market has surprised many by gaining each of the past four months during this seasonally weak period. “Sell in May has many bears pulling their hair out in frustration. Here’s the catch: history says when ‘Sell in May’ doesn’t work right away, the rest of the year can be quite strong. In fact, when April, May, June, and July are all higher for the S&P 500 (like in 2018), the final five months of the year have gained each of the past 10 times,” explained Senior Market Strategist Ryan Detrick. As our LPL Chart of the Day shows, the S&P 500 added nearly 10% on average over the final five months of the year when each month from April until July were higher. August still tends to see some seasonal weakness, but the bottom line is that this suggests higher prices may be likely before 2018 is all said and done. Bulls Could Be Smiling the Rest of 2018.
Midterm Election Countdown: Historically October Best Time to Buy One of the more interesting graphics that keeps coming across my screen(s) is a table of S&P 500 returns in the months leading up to Midterm election day. We have gone ahead and recreated the table using data sourced from the annual Stock Trader’s Almanac starting with the midterm election in 1950. This results in 17 years of data to analyze. This table does not contain a worrisome amount of red and the percentage of time the periods are positive is also quite respectable. Keen observers will notice that the average historical return for the 6 months before midterm Election Day is just 1.31% compared to an average historical return of 4.66% for the 1-month immediately preceding midterm Election Day. In fact, the historical average performance in all periods before the 1-month period is less than 4.66%. So what is really happening in the 6-months prior to midterm Election Day? S&P 500 is actually declining in May/June and then trading sideways until late September/early October. On average the vast majority of S&P 500 gains are from late September to midterm Election Day. Thus far in 2018 there has not been any meaningful decline, but it is still early in August with nearly three months to go before midterm elections.
Historical Bull and Bear Markets of the S&P 500 Aug 16, 2018 There’s been plenty of chatter lately about the current bull market becoming the “longest on record.” Below is an updated look at the length of the current bull market compared to past bull markets for the S&P 500. First things first, though. Until the S&P 500 closes at a new high, January 26th, 2018 represents the end point of the current bull market because that’s the date of the S&P’s highest closing point of the bull market. Thus, the length of the current bull market has been stopped at 3,245 days since January 26th (3/9/09-1/26/18). A bull market is most commonly defined as a 20%+ rally that was preceded by a 20%+ decline. If the S&P never closes above its January 26th closing level, and instead it goes on to fall 20% from that level, a new bear market will have begun with a start date of January 26th, 2018. Since we don’t know whether the S&P will go into a new bear market before it closes above its 1/26 high, or vice versa, we can’t extend the length of the current bull market past the 1/26 high point. Based on the most commonly used definition of bull and bear markets (20% rallies and declines using closing prices), below is a chart showing the length (in calendar days) of bull and bear markets for the S&P 500 since 1927. We’ve shaded bull markets in green and made them positive, while we’ve shaded bear markets in red and made them negative. The current bull market that has lasted 3,245 days is the second longest on record behind the 4,494-day bull market that ran from late 1987 through early 2000. Yes, the S&P 500 went from late 1987 to early 2000 without experiencing a single decline of 20% or more on a closing basis. If the S&P 500 went on to make a new closing high today, the current bull market would be at 3,447 days, which would still be more than 1,000 days less than the longest bull market on record. For the current bull to become the longest on record, the S&P 500 would need to move above its 1/26 closing high and then not experience a 20% decline from an all-time high through June 29th, 2021. Two things stand out the most in the chart below. The first is that bull markets last a lot longer than bear markets. Indeed, the average bull market since 1927 has lasted 981 calendar days, while the average bear market has lasted 296 days. The second is that US bull/bear market cycles became much longer lasting post-WW2. Below is a table showing the 13 post-WW2 market cycles for the S&P 500. The average bull market since WW2 has lasted 1,651 days and seen a gain of 152.4%. The average bear market has lasted 362 days and seen a decline of 31.8%. The current bull market’s gain of 324.6% over 3,245 days is more than double the length and strength of the average bull market. There is always a lot of debate about the 20% rally/decline definition of a bull market. That’s because there have been multiple 19%+ declines from a closing high that just didn’t quite make it to the 20% threshold for a new bear market. Shouldn’t the 19.92% decline back in 1990 be considered a bear market since the index was just 0.08% away from the 20% threshold? Or shouldn’t the 19.39% decline seen in 2011 be considered a bear as well? We try to be as consistent as possible with the data, so we’re always going to use some type of percentage threshold to measure bull and bear markets over time instead of trying to be subjective about them. And we would never try to say that one 19%+ decline should be considered a bear market while another 19%+ decline shouldn’t be. So for those that would rather use a 19% threshold for market cycles instead of the standard 20% threshold, below we offer a side-by-side comparison of the two. As you can see, the 19%+ threshold ends up adding 5 more bull and bear markets to the tally in the post-WW2 era. As mentioned earlier, the current bull market is the 2nd longest on record using the standard 20% threshold for bull and bear markets. If we use the 19% threshold, the current bull would rank as the third longest on record instead of the second longest. At Bespoke, we’ll likely always use the 20% rally/decline threshold as our definition for bull and bear markets. For investors out there that prefer to be subjective about it or include some 19% declines, that’s fine too! In regards to the current bull market, even if you include the 19% selloff in 2011 as its own bear market, the bottom line is that this bull has still been a really long one. There are two things to remember, though, for the time being. 1) As mentioned above, the current bull is actually not aging at this point until it takes out its January 26th high. And 2) — more importantly — bull markets don’t die of old age.
Small caps outperform from late-August through mid-September In the above chart, thirty-nine years of daily data for the Russell 2000 index of smaller companies are divided by the Russell 1000 index of largest companies, and then compressed into a single year to show an idealized yearly pattern. When the graph is descending, large-cap companies are outperforming small-cap companies; when the graph is rising, smaller companies are moving up faster than their larger brethren. The most prominent period of outperformance generally begins in mid-December and lasts until late-February or early March with a surge in January. This time of outperformance by small-caps is known as the “January Effect.” In recent years, another sizable move is quite evident just before Labor Day. One possible explanation for this move is individual investors begin to return to work after summertime vacations and are searching for “bargain” stocks. In a typical year, small-caps would have been lagging and could represent an opportunity relative to other large-cap possibilities. As of Friday’s close (August 17, 2018), Russell 2000 is up 10.3% compared to the Russell 1000 being up 6.7% year-to-date which could dampen small-cap performance this time around. However, the small-cap advantage does wane around mid-September.
Small-Cap Labor Day Advantage by the Numbers Yesterday we noted the tendency of small-cap stocks to outperform large-cap stocks around the Labor Day holiday. Today we present just the numbers based upon the Russell 1000 and Russell 2000 indexes from 1979 to 2017. Small-cap advantage typically begins on or around the 18th trading day in August and lasts until the 12th trading day in September. On average the Russell 2000 has outperformed the Russell 1000 by 0.8% during this time span with the Russell 2000 outperforming 71.8% of the time over the last 39 years.
Made It Well, today is the day. The bull market that started back in March 2009 is now officially the oldest bull market ever – topping the duration of the bull from the 1990s. We took a deeper dive into this recently in Longest Bull Market Ever, and we will be the first to admit that there are some valid arguments to counter the claim that this is really the longest bull market ever. Remember, a 20% correction based on closing prices is the commonly accepted threshold to mark the end of a bull market. Well, the S&P 500 Index corrected more than 20% intraday back in 2011, and in February 2016 the median S&P 500 stock was down 25% (as the S&P 500 slid 14.2%). In other words, we’ve had what felt like bear markets along the way. “Is this really the longest bull market ever? You can argue it either way, but the bottom line is probably no one back in March 2009 thought we’d even be having this argument! Now what matters more to us is this bull market looks like it has legs left, thanks to the benefits of fiscal policy just starting to work through the system, strong corporate profits, and increasing confidence,” explained LPL Research Senior Market Strategist Ryan Detrick. Here’s the chart we shared recently. What does your average bull market look like? We went back to World War II (WWII) and found that the average bull market lasted just over five years and gained 165% on average. It is also worth noting that although this bull market might be the longest, it isn’t the greatest, as the 1990s bull market gained 418% at its peak; well above the 323% gains of the current bull market.
Finally It took nearly seven months, but the S&P 500 Index finally closed at a new all-time high on Friday. Many clues along the way suggested new highs could eventually come, like strong overall market breadth and excellent earnings growth. Still, the big question now is, what happens next? “Investors have been patiently waiting for new highs in the S&P 500, even while small caps and technology have been making new highs for months now. Here’s the good news: When the S&P 500 has gone at least six months without a new high, the index has been higher a year after the next new high in 17 out of the past 18 instances, going back to 1950,” explained Senior Market Strategist Ryan Detrick. As our LPL Chart of the Day shows, long waits between new highs tend to foreshadow strong outperformance in the subsequent year. Could Friday’s new high be another sign that the bull market is alive and well? It very well could be. Two big reasons we see continued equity strength and an extension of this economic cycle are strong earnings and an accommodative Federal Reserve (Fed).
