The summer is slackening down. Corporate-earnings season is just about through. Federal In readiness policymakers have thoroughly aired their thinking at the annual Fed research talk last week.
And after seven months of retrenchment, repair and gain, the broad stock indexes have notched a hard-won breakout to a recount high.
In other words, the markets have reached a “now what?” half a mo, on the cusp of a consequential midterm election and an approaching climax of a global-trade reordering.
Looking strictly at the vend’s behavior, the setup is fairly encouraging. A breakout to a new high by definition means the bull buy remains intact and, by extension, no past buyer of stocks at the index horizontal feels anything but smart for having played the game.
Over the one-time 90 years, when the S&P 500 makes its first 52-week turbulent in six months or more — as it did on Friday — the index has been higher over the ensuing year 94 percent of the schedule, according to Jonathan Krinsky, chief market technician at MKM Partners.
And in erstwhile years when the S&P was up between 5 percent and 10 percent midway including August, the returns for the remainder of the year have typically been undeniable, with gains better than the average of all years.
Traders superiority also be feeling the muscle memory of 2017, when the S&P 500 was up a solicitous but unspectacular 8.3 percent into the third week of August preceding accelerating to surge another 15 percent over the next five months — culminating in the brim at 2,782 on Jan. 26.
The market doesn’t always make it so easy as to play the unchanging late-year melt-up script two straight years, but one can’t ignore the chance that something comparable could unfold.
Yet the very good news reflected in stock evaluations a year ago could be difficult to top — and perhaps explains why the market has been, and could wait, relatively hard to please. The big corporate tax cut was rounding into shape unbiased as Europe and Asia economic data started to pick up and oil prices began to ascent, creating a rare array of positive forces that led to an unheard-of upsurge in S&P 500 earnings growth nine years into an economic enlargement.
The sheer brute force of the good news that it’s taken to force the S&P 500 to its 8.3 percent gain this year — that 20 percent profit expulsion, a Fed stressing patience, tame Treasury yields, pliant credit hawks and a $1.5 trillion pace of combined cash dividends and stock buybacks connivingly to shareholders of S&P 500 companies — is notable.
Bullish observers will right point to the overhang of the president’s decision to wage “trade wars of option” to explain why stock prices have lagged earnings growth so dramatically. Perhaps.
But it’s conceivably just as likely that the anxiety generated by tariffs and trade disruptions has served a serviceable purpose: to restrain the runaway investor optimism of January, keep the “rampart of worry” in place and trigger a needed valuation adjustment in high-flying broad industrial stocks.
The main threat of an aggressive trade posture toward China is likely a panicky extraordinary flight from emerging markets that would send the U.S. dollar rocket and upend the global capital markets. For the moment, this threat seems detract from, with China stocks stabilizing a bit and the ICE U.S. Dollar Index off nearly 2 percent in the days of yore couple of weeks.
The market’s failure to climb in lockstep with corporate profit earns makes sense if one considers this to be a mature economic expansion and financial-market cycle. How much solvent activity has been pulled forward or temporarily goosed by the tax package, repatriated outlandish corporate cash and boost in government spending this year? And how much command earnings growth fall off as these forces wane and cost burdens build into 2019?
The surface indicators lean positive. According to FactSet, analysts’ consensus earnings anticipates for the next 12 months continue to climb, and estimates for 2019 are possessing up better than usual. Yes, the growth rates will drop dramatically, and the broadening will likely become spottier across sectors. But right now the second from corporate profitability doesn’t appear to be wobbling.
But how much stay for improvement is there across the array of factors that drive regular prices?
Leuthold Group strategist Jim Paulsen this week cooked up a story way of capturing this, computing how much of the stock market’s capacity for knowledge has already been “used up.” He tracked where we are in terms of equity valuation, link yields, corporate profit margins, unemployment and consumer confidence on a proportion stretching back to 1952.
On average, these indicators right now exceed 80 percent of all one-time readings of the last 66 years. To Paulsen, this suggests scarcely room for the markets to be pleasantly surprised by the fundamental backdrop from here.
This doesn’t hint at the market is peaking, simply that — from this perspective — foremost returns will be unimpressive over the next few years (in the 5 percent a year go, say).
But the market delivers its returns in big servings, often when least foresaw, and then takes some back without much notice, as we’ve courted in the past year.
It’s possible that the rush higher in January represented the consideration of peak momentum, maximum valuation, cresting optimism and greatest manipulate for bullish investors, and yet this doesn’t mean it was a decisive high in assesses. The market is somewhat more selective and operating, for now, at a more defensive, slower figure of advance.
Not necessarily better or worse than the melt-up that culminated seven months ago — only different.