Keep on Keepin’ On
By John Stoltzfus,
Chief Investment Strategist
What a Long, Strange Trip it’s Been
The most unloved bull market we’ve ever experienced celebrated its 9 year anniversary last Friday
Last week served to remind long-term proponents and even skeptics of the current bull market, which emerged from the S&P 500’s dramatic low of 676.53 reached on March 9, 2009, that a powerful bull market properly fed by central bankers sensitive to economic conditions can climb multi-year walls of worry for longer than its doubters and even its supporters might imagine or project.
For those who experienced and still recall the period from the fall of 2008 through most of the first quarter of 2009 the bull market’s birth wasn’t an easy one. The current bull market has been tested and doubted through the entire journey by bears who call for its demise and skeptics who in their skepticism have “missed the boat.”
We have found from our experience with previous market cycles since we were first hired on Wall Street in 1983 that there is no expiry date stamped on a bull market. Some like this one are born out of periods of despair and find their way upward on the wings of economic recoveries. Others are born out of innovation (the tech boom of the nineties) that excites, inspires and boosts investors’ attitudes and spirits.
Eventually bull markets succumb to deteriorating fundamentals (economic and/or corporate)—sometimes brought about by central bankers who misjudge the rate of inflation and either tighten or ease the cost of credit too soon, too late, too hard or not enough.
Sometimes bull markets end because the central trends that drove them cease, sometimes via a burst bubble, an exogenous shock or dramatic deterioration of corporate fundamentals.
Bull markets in our experience don’t end because they’ve run too long. Bull markets don’t come with an expiry date stamped on them like a milk carton or can of peaches.
For now the current bull appears to be in good health supported by fundamentals economic and corporate that appear sound and poised to continue to improve for some time into the visible horizon.
“What really matters for bull markets to persist and have legs to climb the next “wall of worry” are the fundamentals: economic growth and corporate earnings.”
The recently enacted tax reform law stateside is likely as well to provide a boost in liquidity for many companies (via lower tax rate and/or repatriation of money held abroad) that could offset some of the effects of interest rate normalization fostered by the Fed.
It should be said that bull markets like the current one tend not to run up in a straight line (and if and when they do they often find a catalyst to curb their enthusiasm via interim corrections and sometimes a short bear market phase).
Longer-term bull markets take breaks, pass through detours, and sustain periods of malaise, greed and even fear. What really matters for bull markets to persist and have legs to climb the next “wall of worry” are the fundamentals: economic growth and corporate earnings.
Earnings Season Wraps Up
Q4 earnings season with some 492 of 498 companies in the S&P 500 having thus far reported shows earnings up 14.3% on the back of revenue growth of 7.7%. Four of the S&P 500’s 11 sectors posted double-digit earnings growth in the period. One sector, energy (admittedly benefiting from favorable comparisons with prior earnings seasons), posted triple-digit earnings growth in the quarter while the remaining six sectors posted earnings growth that ranged from 6% to as much as 9.3%.
The latest earnings season has seen even stronger earnings growth reported among the S&P 400 (mid-caps) and the Russell 2000 (small caps). Those benchmarks reported earnings through last Friday respectively higher 22% and 37.9% in the quarter.
Not too shabby and supportive of the case for equities at this juncture in the markets.
Payrolls Grew Strongly in February
Last Friday the Labor Department’s non-farm payroll number surprised to the upside showing the addition of 313,000 jobs in February—more than the number expected in an earlier Bloomberg survey of economists.
The average hourly wage advanced 2.6% year-over-year, a slight deceleration from the January number, which at 2.9% had worried markets about inflation and the potential for a faster pace of Fed increases just a month ago when it was released.
A downward revision to the YoY January wage number to 2.8% along with a boost in the labor force participation rate to 63% of the adult population up from 62.7% in January as well as a headline unemployment number at 4.2% succeeded in soliciting a positive response from the equity markets on Friday.
Fears of Protectionism Receded
Investors’ fears of protectionism and the threat of possible retaliation ebbed late last week after the administration, responding to concerns and pressure from both sides of the political aisle as well as from business leaders and even members of the administration, excluded Mexico and Canada from being subject to tariffs on steel and aluminum. The Administration even opened a door for allies and other trading partners to negotiate deals to avoid the levy.
The market which had suffered no small degree of volatility tied to tariff/protectionist risk throughout most of the week responded positively to the administration’s decision to curb the scope of its tariff regime.
As trading came to a close stateside last Friday all of the major equity benchmarks showed substantial gains on the week. The Dow Jones Industrial Average, the S&P 500, the S&P 400 (mid-caps), the Russell 2000 (small caps) and the Nasdaq Composite (some 40% weighted in technology related stocks) respectively advanced 3.3%, 3.6%, 3.8%, 4.2% and 4.2% on the week ended Friday.
Foreign markets joined the stateside relief rally as well though with less enthusiasm. On the week the MSCI EAFE (developed markets ex-US and Canada), The MSCI Emerging markets and the MSCI Frontier markets respectively advanced 1.8%, 2.1% and 1.2%.
The Week Ahead
This week investors will likely be focused on a number of items for further clues as to the near-term direction of the markets.
Today (Monday): The US Treasury is scheduled to auction $21 billion of 10-year notes.
Tuesday: The Treasury is scheduled to auction $13 billion of 30-year bonds as well as $28 billion of three year notes. The rate of participation in the auctions will provide a measure of investors’ sentiment towards fixed income, inflation expectations, as well as for the offerings themselves.
Also on Tuesday the Bureau of Labor Statistics releases consumer price index data.
Wednesday: The US Census Bureau releases retail sales numbers for February
Thursday: the Philadelphia branch of the Federal Reserve provides the results of its business activity survey; the National Association of Homebuilders releases data on the housing market.
Friday: University of Michigan Consumer Confidence; US Census Bureau reports housing starts.
With earnings season wrapped up, tax reform launched, and steel and aluminum tariffs to take effect soon, investors will have plenty to ponder.
We believe patience, fortitude and an eye for opportunities that could present themselves as interest rates work through the process of normalization, trade negotiations garner attention and equity markets respond to it all, could prove rewarding.
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