As of March 19, 2019
- At the end of February, the S&P 500® Index was just 5 percent shy of its all-time high.
- Yet the economy in the United States, Asia and Europe appears to be softening.
- In the final quarter of 2018, S&P 500 profits increased 13.4 percent, while the U.S. economy grew at a 2.6 percent annualized rate.
- We expect investors to focus on big-picture items and the outlook for the global economy.
- In the first quarter, S&P 500 profit growth is projected to decline for the first time since 2016.
- U.S./China trade negotiations and Brexit will be a major focus over the next few weeks.
Data Source: FactSet
Happy birthday bull market
This month marks the 10th anniversary of the stock market’s bottom during the financial crisis. By March 9, 2009, the S&P 500 had fallen a remarkable (and very painful) 57 percent from its October 9, 2007 peak. The losses suffered in those dark days had not been seen since before World War II.
Fast-forward 10 years, and by most measures, the current bull market is now the longest in history. Through the end of February, the S&P 500 climbed more than 400 percent above its financial-crisis lows on a total return basis. Remarkably, the market gains since that 2009 bottom are more than double that of the prior two bottom-to-top cycles (which ended in 2000 and 2007, respectively).
As investors navigate the latter stages of this economic expansion, central banks have pulled back on efforts to stimulate the economy, equity valuations appear fair, and profit margins could see pressure from wage inflation and modestly higher interest rates. While equities tend to perform well in the latter stages of the business cycle, stock prices have come a long way by historical standards since their financial-crisis lows. As such, we must consider how much upside potential remains for stocks in this cycle.
The current economic expansion, which began in June 2009, is now 117 months old and is the second longest on record. Only the economic expansion that began in March 1991 and lasted 120 months is longer.
Yet, over the long term, stock prices follow trends in corporate earnings and economic growth. We believe conditions on both fronts are very likely to propel the current economic expansion into the longest on record once we reach July.
Indeed, it’s not a stretch to say the current economic cycle, or the bull market run in equity prices for that matter, is long in the tooth. Bull markets do not die of old age and are almost always killed by recessions, however. In our view, a recession is unlikely to materialize in 2019. Although more caution seems justified in the current environment, a little optimism and a balanced perspective are essential ingredients in any well-constructed portfolio.
Where do markets go from here?
Investor optimism quickly rebounded in January and February, helping the Dow Jones Industrial Average get off to its best start to a new year since 1987. More recently, however, risk assets have hit the brakes, as investors appeared to take a pause. To map out opportunities against risks, we can weigh both sides.
Bullish views on the market include:
- Continued growth in the U.S. economy
- Strong consumer sentiment
- Solid labor market conditions
- Healthy signs from the market’s technical indicators
- A pause by the Federal Reserve on further interest rate hikes
- Negative expectations for corporate profits, which offers more potential for upside surprises
- Historical trend that strong starts to the year generally support positive gains through year-end
Nevertheless, bearish views offer a warning:
- The failure of U.S. stock indexes to reach new highs
- Weakening economic data outside of the U.S.
- Slower earnings growth as the benefits of the 2017 tax cuts fade
- Rising labor costs that may squeeze profit margins
- Declining small business confidence
- Growing investor uncertainty as the 2020 U.S. presidential election cycle heats up
In our view, stock prices have an opportunity to climb higher over the course of the year if the fundamental backdrop plays out as we expect.
With so much of the trajectory for economic and corporate growth this year contingent on how trade policies shake out, investors should be prepared for a bit more dynamic price movements in markets over the near-term.
The stock market has likely priced in moderate-to-slowing economic growth. However, if incoming data suggest a more significant and prolonged downturn, we would need to reassess our outlook. Our advice is to maintain the course for now and follow a well-diversified strategy that sticks close to strategic targets. Consult with your financial advisor to review your present investment strategy, and make sure it is positioned consistent with your risk tolerance level and expected market conditions.
Data source: Morningstar Direct
As of March 19, 2019