Monthly Outlook: March 2019
Last month we discussed the stock market “yo-yo,” a dramatic 4-month dip & rebound of about 15%. In February, stocks extended the rebound a bit more with another 2% gain to complete the full yo-yo cycle. The S&P500 is now back to where it was four months ago, but after a wild ride. In fact, the S&P500 is where it was a year ago, about 2,800. The market has gone nowhere in a year! I kid you not, look it up. That’s more than a little frustrating to investors who expect to make money every year. Looking back at 90 years of stock market history, we know that only 7 years were flat (+/-2%). And never was a flat year followed by another flat year. So, we have to ask, “Now what?” History also tells us that stocks have been up 73% of the years and down 27% of the years. We’ll discuss, below, what the price trends, economic data, and valuations suggest is possible for the year ahead.
Price Trends are Up
Of all the indicators we use, price trends are the most important. After all, it’s the price that matters. All the other indicators are clues about what price might do. After the 4-month yo-yo, most stock market price trends have just flipped back to a slight uptrend. The S&P500 is now a scant 1.3% above its 200-day moving average trendline, but that counts as an uptrend. U.S. stocks and emerging markets are similar, with newly resumed, though slight, uptrends. Europe and Asia continue to downtrend, however, since June 2018. Bonds continue to uptrend, offering small gains. Our iFolios strategy is to actively manage the allocation of client portfolios, based on price trends. We reduced stock market allocations in October for protection, when they turned down. And after the yo-yo and resumption of uptrends, we’re gradually adding back positions for growth. This time around, the active allocation trades we made were a bit of a wash, but we see it as “no harm, no foul.” That said, the new uptrends we see in U.S. stocks are fragile and new. We’ll be watching carefully to see if they become sustainable. Also, will Europe and Asia join the uptrend party? Global stocks typically trend in the same direction, so until their trends synchronize, we’ll remain skeptical and vigilant.
Economic Data Offers Clues
Although stock market price trends have become more positive, economic data is softening. Even the Federal Reserve has stated that they are on hold with monetary tightening given the slowing economy. The Conference Board’s Leading Economic Indicator peaked in October 2018 and has been drifting lower. Similarly, the ECRI Weekly Leading Index declined 4.2% last month and is now lower than where 5 of the past 7 recessions started. Purchasing Managers Index fell to 54.2, down 2.4 from last month. A reading below 50 is considered recessionary so we’re not quite there yet. Retail sales fell 1.2% last month and we’ve heard of hundreds of store closings. Housing Permits and Housing Starts have both peaked in January 2019 and are softening. Lastly, the Unemployment Rate rose to 4.0% last month, the first time it’s been above its 200-day moving average since it began falling in April 2010. The takeaway from these economic data points is this: The global economy is clearly slowing, but…it’s too soon to call for a recession. We just need more time and more data. Even if the data continues to soften, it’s unlikely that we would fall into recession until late 2019, at the earliest. At the same time, there’s hope that trade negotiations with China go well and that Brexit occurs in an orderly way. Both would give a boost to the economy and, most likely, keep stocks trending higher.
Valuations – Still High
Lastly, stock market valuations remain near record highs. Total Market Capitalization to GDP (TMC/GDP) is as high, or higher, as previous peaks of 2001 and 2007. Other valuation metrics including P/E10 and Margin Debt confirm peak high levels. Valuations are excellent long-term indicators, but offer very little for short-term timing. Summary: If/when price trends turn down, economic data softens, and valuation levels are high, the potential for significant price declines would be high. We’re watching but, for today, we’re ok. Onward & upward!