Wait For It
Stock prices, measured by the S&P 500, rose an impressive 3.93% in April, boosting the total return to stocks to 18.25% year to date. These returns are among the best ever for the first four months of the year. The month was notable in that prices rose in all but five of the 21 trading days, a 76% batting average. Also notable is the low volatility, or daily price movement. With the exception of April 1st, when prices rose 1.16%, the average daily price change (up or down) was only .25%. This compares to December 2018, when the market was in free-fall. The average daily price change was 1.38%.
Stock prices are behaving as though they are intent on setting a new high water mark. The last time the S&P 500 hit an all-time high, September 20, 2018, it closed at 2,930.75. At that point, prices were comfortably up 13.07% for the year. Few investors would ever have guessed their returns would be negative by year-end. Between September 20 and December 24, stock prices fell 19.36%. One of the most universally unwelcomed Christmas presents ever – a bear market.
A strong start to the year for stock prices cannot necessarily be extrapolated forward. As we saw last year, the strong behavior of stocks can turn on a dime. In the past, there have been years such as 1995, when stocks did continue higher after a strong start to the year. Then, other years with strong starts, such as 1930, infamously saw the complete implosion of stock prices by year end. More often than not, after a big start, the market tends to saw-tooth for the remainder of the year, challenging investor’s resolve against giving back precious gains with each subsequent downswing.
In an effort to gauge where things stand, investors often try and establish a point of reference based on the duration of the economic cycle. The current expansion has been in place since early 2009. The average expansion over the last 70 years has been roughly 5 years. By these simple terms we ought to prepare for a contraction in the fundamentals and stock prices. Some have pointed to the more services oriented nature of the economy, and the general low intensity of the expansion. Questions revolve around the degree of pent up demand, the fact wages have been suppressed, and changes in the structure of the labor force. The recovery has been going on since 2009, but not all segments of the economy have responded equally.
Currently, the fundamentals are mixed. Economic growth is challenged. The tax cut was a one-time thing and will not spur any further corporate spending. 1Q earnings reports have been alright, but only in relation to reduced estimates. Revenues have underwhelmed. It’s harder to mask underlying issues with revenues, than with earnings. The US posture toward China, and other trading partners, will not likely be resolved anytime soon. The risk here is for unintended consequences. Finally, and likely a positive consideration, the Federal Reserve is seemingly on hold for a number of months.
We are seeing some positive signals. While we find stocks with secular growth trends attractive, we are also paying more attention to defensive businesses. Utilities and staples have been two of the best performing sectors over the last 6 months. We are also seeing the beginnings of recovery in housing related stocks likely due to the lower interest rates and in spite of the SALT limitations, and some interesting support from semiconductors.
In conclusion, we do not want to give away our shot. Stocks are fully priced and we are in the midst of a global stock price rally. We are jointly committed to our secular growth stocks, and looking at select opportunities to take profits and put some $ onto the sidelines. We are also beginning to see the first signs of value stocks attracting interest. In many ways this is a signal long investors are beginning to lose their conviction. If this continues, we will address some of our holdings appropriately.
In the immediate term, we look forward to speaking to you about keeping equity exposures in check. Complacency is high and with this backdrop, things will be ok until all of a sudden they are not. We don’t want to be looking at one another wondering “what did we miss.” Please feel free to call if we have not spoken recently.
Bruce Hotaling, CFA