Everyday, Everyday I Have the Blues
By John Stoltzfus,
Chief Investment Strategist
From the start of the year through the end of the first quarter, the market made what was essentially a “round trip” of a roller coaster-like ride in Q1. As a result, investor sentiment in the first segment of the year within relatively short periods of time moved from “risk-on” to “risk-off” and back again.
But for all the drama to the downside at the start of the year, by the time the dust settled, eight (or more than half at 57.1%) of the 14 weeks that ended within the quarter had seen the S&P 500 deliver positive returns on a weekly return basis.
Six (or less than half at 42.9%) of the 14 weeks ended in the first quarter saw the broad market lose ground. In one of those down weeks (and a little more than a month before the market started its powerful rally), stocks fell nearly 6%, causing no small degree of drama and concern.
All told, stocks were in a downward trend from the last day in 2015 through February 11, 2016 as the market fell 10.51%, weighed down by: concerns over economic growth (including a misperception by many investors that we were headed into if not already in recession), further weakening in international currencies against a strong dollar and plunging commodities’ prices, led by oil, which took investor focus and opinion hostage.
Then things suddenly appeared to change. Or was it just a change of perception and projection?
From the low established on Feb. 11th through the last day of trading in the first quarter, the S&P 500 rallied 12.61%, ending the quarter just 0.77% above where it started the year, effectively having made just a little bit better than a round trip from where it ended the fourth quarter of 2015.
Improving stateside economic data along with actions taken (and not taken) by central bankers in places as distant as the US, Europe, the UK, Japan and China turned the beat around, and the market changed direction to march to the beat of a different drummer.
On the first day of April, the market advanced a little over three-quarters of a percent on the day, closing at 2072.78, or 1.41% above where it had started the year and just 2.7% below its record high of 2,130.82 set last May.
Among the factors that caused the market to change direction and move higher we’d include:
• A rotation stateside out of growth and into value (see page 22);
• A broad weakening of the dollar as the greenback lost ground against nine out of ten G-10 currencies and against 20 (of 24)EMs currencies by the end of the first quarter (see page 14).
• Apparent near-term stabilization in the price of oil;
• Rallies in a broad array of commodity prices;
• Further actions taken by foreign central bankers to counter deflation in Europe and Japan as well as efforts taken by officials in China to counter sluggish growth;
• Improved economic data stateside centered on job growth, consumer confidence, housing, auto sales and even some improvement in manufacturing (as the quarter neared a close), as well as the effect of a moderating dollar that proffers support of US businesses, particularly those with operations abroad, including US multinationals;
• Comments from Fed Chair Janet Yellen indicating that the Fed will be sensitive to economic weakness abroad even as it remains committed to a process of interest rate normalization in the US.
From the equity market’s low point on February 11th through April 1st (as we go to press), stocks rallied globally, led by the US, with the S&P 500, the S&P 400 (mid-caps) and the Russell 2000 (small-caps) respectively moving 13.3%, 17.2% and 17.2% higher (see pages 21 and 32).
Over the same February 11th to April 1st period, foreign markets as represented by the MSCI EAFE (developed markets ex-US and Canada), the MSCI Emerging Markets index and the MSCI Frontier markets index rallied 8.1%, 15.9% and 2.9% respectively.
With US benchmark Treasury interest rates now lower than they were at the start of the year, when many investors were looking for the Fed to be more aggressive than it appears it now will be near term and perhaps for the rest of this year, stocks could garner further favor from investors and move higher.
Consider that 2-year, the 5-year, the 10-year and the 30-year Treasury yields are down from their respective highs at the start of the year with (as we go to press):
• the 2-year yielding around 0.72%, down from 1.05% at the end of last year;
• the 5-year yielding around 1.22%, down from 1.76% at the end of last year;
• the 10-year yielding around 1.77%, down from 2.27% at the end of last year;
• the 30-year yielding around 2.6%, down from 3.02% at the end of last year.
The next hurdle on the wall of worry for stocks is likely valuation as Q1 earnings season comes up on the horizon.
Q1 earnings season will unofficially start when Alcoa (AA) reports results a week from today after the market close on April 11th.
As of last Friday, April 1st, the 12-month trailing P/E multiple of the S&P 500 stood at 18.83x, up from a 2016 low of 16.54x on February 11th of this year (see figure below).
The average 12-month trailing multiple of the S&P 500 all the way back to the end of 1965 stands at about 16.56x.
At 18.83x at the start of April, the market’s trailing 12-month P/E multiple stood at an 13.7% premium to the market’s long-term average 12-month trailing multiple of 16.54x.
Over the last two years the market (as illustrated by the performance of the S&P 500) has shown resistance to pushing through levels bordering 19x (see page 27).
That said, the average yield on the 10-year Treasury note since the end of 1965 through the start of April stands at 6.54% versus a current yield on the 10-year of around 1.70%
While economic, revenue and earnings growth are principal factors that move stocks higher, the relative value of asset classes and their respective prospects for better returns can serve as near-term factors determining which asset classes are favored by investors.
Stay tuned.
For the complete report, please contact your Oppenheimer Financial Advisor.