U.S. stocks are sitting at the same levels they were seven months ago, but the path has not
been straight. Equity investors have been on a bumpy ride since September 2018, and
investors’ resolve has been tested amid the back-and-forth in trade negotiations, a historic
government shutdown, Brexit, the Federal Reserve’s (Fed) U-turn in policy, and signs of
a global slowdown.
Fortunately, the S&P 500 Index weathered a steep decline late last year and has found its
way back to record highs. Stocks’ historically strong start to the year has been
promising, but there are still signals that more weakness could be in store before the S&P
500’s next leg higher.
On September 20, 2018, the S&P 500 closed at a record high of 2930.75. Fast forward to
today, and U.S. stocks have just passed that peak. However, over the last seven months,
investors have experienced severe market whiplash: a near-bear market in stocks’ worst
fourth quarter since the financial crisis, followed by a sharp V-shaped recovery and the
best first quarter for the S&P 500 since 1998. In fact, we have now climbed more than
20% from the lows on December 24, 2018, and the volatility that accompanied much of
last year has been largely absent. We have maintained that the late-2018 sell-off was
overdone, and we see a compelling case for equities near these levels based on sound
economic fundamentals. However, the recovery has been arguably a bit fast considering
that many of the reasons for the decline have yet to be resolved. First quarter earnings
growth will likely be flat, U.S.-China trade negotiations are still ongoing, and structural
challenges in Europe and Japan will likely persist. Short-term trade and political
headwinds may subside as the year progresses, but there is still considerable global
uncertainty weighing on economic activity. Stocks’ overbought conditions, along with
slightly weaker economic and corporate profit outlooks, could hinder gains in the short
term.
Stocks’ strong start to a year typically sets the stage for more gains. In fact, nine of the
past 10 times the S&P 500 was up at least 10% during the first quarter, the rest of the
year was also positive. However, it’s important to note that in these occurrences, stocks’
momentum tapered off over the following months. When the S&P 500 has climbed 10%
in the first quarter, the average return for the final three quarters of the year has been
5.8%, lower than the 6.3% gain in the final three months of the average year. Stocks
have also been more susceptible to midyear volatility after a strong start. In these years,
the S&P 500 has sold off an average of 8.9% on route to gains in the last three months.
The S&P 500 has yet to endure a 3% pullback over the course of its recovery this year, so
based on history, it would be wise to temper expectations for stocks over the next few
months.
Fixed income markets are also sending pessimistic signals on the economic outlook. The
10-year Treasury yield has struggled to rebound from a 15-month low as bond investors
position for more weakness. Lower yields have conflicted with other signs of global
economic strength: copper is outperforming gold, cyclicals have outperformed defensive
sectors over recent weeks, and equities around the globe are rallying. The bond market’s
conflicting signals hint to the complicated environment investors are facing.
While market volatility can be painful at times, we encourage suitable investors to view
pullbacks as opportunities to rebalance or add to current positions at cheaper prices.
Investors who have stayed the course over these past several months have been rewarded
with higher prices, just as they have been in other parts of this bull market. Overall, we
still believe the S&P 500’s fair value is around 3,000 based on sound fundamentals.
However, with the index about 3% from that target just four months into the year, we
expect more volatility in the near term as market momentum fades.
The views expressed are provided for information only and are not to be used or
considered as an offer or solicitation to buy or sell securities or investment products. To
determine which investment(s) may be appropriate for you consult your financial advisor.
• The economic forecast set forth in this presentation may not develop as predicted,
and there can be no guarantee that strategies promoted will be successful.
• Data provided by LPL Financial.
• All indexes are unmanaged and cannot be invested in directly. Unmanaged index
returns do not reflect fees, expenses, or sales charges. Index performance is not
indicative of the performance of any investment.
• Rebalancing a portfolio may cause investors to incur tax liabilities and/or
transaction costs and does not assure a profit or protect against a loss.
• All investing involves risk including loss of principal