Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is A+ (extremely favorable). Consumer spending is expected to strengthen as individuals with lower tax rates spend their windfalls.
THE FED AND ITS POLICIES: This factor is rated C- (Below average).
BUSINESS PROFITABILITY: This factor’s grade is A- (very favorable). Corporations are in the midst of releasing 4th quarter earnings. Earnings season has been stellar, with S&P profits growing at a fast pace.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 5. These risks deserve our ongoing attention.
Last week, U.S. Stocks and Foreign Stocks and Bonds all decreased.During the last 12 months, STOCKS outperformed BONDS.
Returns through 2-9-2018
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
-.1
-1.9
1.0
1.2
1.8
3.6
US Stocks-Standard & Poor’s 500
-5.2
-1.8
15.8
10.8
13.9
9.3
Foreign Stocks- MS EAFE Developed Countries
-6.2
-2.8
17.9
6.1
6.4
3.1
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week Laurie will discuss:
“The new world of planning under tax reform.”
Laurie will take your calls on this or other topics. This show will be broadcast at the regular time WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
So that’s what a correction feels like. Yes, it was painful, but there was a curious sensation about this one.
It’s been a long time since we’ve experienced a drop like we did last week. The Dow Jones Industrial Average tumbled 1330.06 points, or 5.2%, to 24,190.90 last week, its worst since Jan. 2016. The Standard & Poor’s 500 index slumped 5.2% to 2619.55. The Nasdaq Composite dropped 5.1% to 6874.49. On Thursday, both the S&P 500 and Dow had dropped more than 10% from their Jan. 26 high, the definition of a correction, though they made back some of those losses in a late-Friday rally.
And what a strange correction it has been. Unlike the past ones since the end of the financial crisis, this correction was caused by fears of too much growth, rather than concerns that there wouldn’t be enough. When the S&P 500 tumbled 13% from Nov. 3, 2015, through Feb. 11, 2016, it was caused by a collapse in oil prices that then spread into high-yield bonds, raising the specter that a recession was looming. Not this time. Economic data continue to come in strong—the Atlanta Fed’s GDPNow indicator estimates 4% growth this quarter—while companies continue to report strong earnings and give upbeat guidance even when the benefits of tax cuts are excluded. Even the high-yield bond market is refusing to act as if a crisis is at hand.
Sure, we can cite a litany of reasons for the correction. The market was overbought and overvalued. Investors had misjudged inflation and miscalculated how high bond yields could go. But really, we were just overdue. Too many traders had bet the market’s calm would last forever. It’s probably the most overused statistic about this market, but the S&P 500 had gone more than a year since its last drop of 5% or more.
So, a correction is what we got—and an uncomfortable one, just like it’s supposed to be. “They should be painful,” says Thomas Digenan, Head of US Intrinsic Value Equities at UBS Asset Management.
Still, the market needs a narrative—and so it’s latched on to whatever’s handy, in this case that the Fed is so far behind the curve that inflation will spike and bond yields will soar. As with many good stories, there’s a kernel of truth to this one. Inflation is picking up, bond yields are heading higher, and the Fed is behind the curve, says Richard Bernstein, chief investment officer at Richard Bernstein Advisors. Many had been reluctant to embrace that idea. Now they may have no choice. “The employment report destroyed the narrative that there would never be inflation again,” says Bernstein, who doesn’t foresee the correction becoming a bear market. “And that caused chaos at this point.”
History suggests that this correction isn’t the end of the bull market, despite the chaos. Part of that has to do with what came before the rally—a long period of what market technicians call consolidation.
From May 19, 2015, through July 11, 2016, a period that included a correction, the Dow went nowhere, explains Randy Watts, chief investment strategist at research shop William O’Neil. The next day, the benchmark hit a new high, and the Dow went on to gain 45% over the next 80 weeks.
Watts sees more similarities to a breakout that occurred in 1995. It occurred well into a bull market—just like the current one—and gains have been similar at the same period of time. And each of those initial rallies came with no hiccups—neither had even a 5% drop before their first correction. That bull market ended up running for 255 weeks, with the Dow nearly tripling during the same period. If the Dow follows that pattern, there could be more upside ahead.
Trading action suggests that the market could be close to finding a bottom. After hitting a new all-time high on Jan. 26, the S&P 500 had tumbled through its 20-day moving average a week later, and then through its 50-day on Monday. When the S&P 500 ticked below its 200-day moving average early Friday afternoon, it looked like that wouldn’t hold either. Instead, a furious rally ignited and the index finished up 1.5%. “At least it respected one technical level,” says Fundstrat technical analyst Robert Sluymer.
That doesn’t mean that the 200-day will hold again on Monday, but there’s no reason to call the end of the bull market just yet. Even Stifel Head of Institutional Equity Strategy Barry Bannister, who correctly called the correction last month, doesn’t foresee it becoming a bear for the simple reasons there’s no recession in sight.
Does that mean it’s time to rush in and buy everything in sight? No. Bannister expects a bottoming process, not a V-shaped bounce. And it might take a higher inflation print—the consumer price index is being reported on Wednesday—and a 3% yield before investors feel that the worst is over. “It could be a capitulatory moment for the stock market,” Bannister says. Unless we’ve already had it.
If the stock market decline starts to snowball, you’ll hear about it from the news media—over and over. But we will pass along a thought based upon experience: Don’t become your portfolio’s worst enemy by allowing yourself to get caught up in the negative hysteria. Instead, remind yourself that the market has experienced 20 drops of 10% to 20% since World War II (plus 13 bear-market tumbles of at least 20%). Even so, the market has bounced back each time. Let’s go over some terms you will encounter in the news media:
“Correction” is an investment term being used loosely and often incorrectly by the media. A correction is a series of stock market declines over several days or weeks leading to a 10% to 20% decline from a stock market high. That would be a drop of approximately 2,700 points or more in the Dow Jones Industrial Average (a commonly used index to describe the stock market as a whole). And, most importantly, the stock market typically recovers in a relatively short time of 3 to 12 months.
A “bear market” is a decline of more than 20% from a market high over several days or weeks. A drop of 5,400 points or more in the Dow Jones Industrial average would be called a bear market. Bear market recoveries typically will be longer than corrections.
Market movements described above could happen fast. Trying to decide if a weakness in the stock market is turning into a correction or a bear market is known as timing the market. It’s nearly impossible to do. Just when you’re sure the 5 percent drop will turn into a 10 percent correction, the market rebounds and hits new highs.
Instead of using market timing, our strategy earmarks money you intend to withdraw during the upcoming years: 1, 2, 3, 4 or even 5 years. This money is assigned to more stable bonds and alternative strategy mutual funds. Secondly, we attempt to broadly diversify your portfolio across asset classes and sectors. That means holding a balanced mix of stocks, bonds, and alternative strategies. The stocks will attempt to profit from market upswings. The bonds and alternative strategies attempt to protect part of your portfolio from market drops.
The specific mix of stocks, bonds, and alternative strategies is called your asset allocation. It depends on your personal financial goals. If investors don’t need the money for years, then many investors will want to have a higher mix of stocks. Please contact me if you have questions about your portfolio’s asset allocation or whether enough money is earmarked for future withdrawals.
Starting in 2018, the “kiddie tax” is changed substantially. First, a child’s kiddie tax is no longer affected by the tax situation of his or her parent or the unearned income of any siblings – this makes tax return preparation simplified. Second, the taxable income of the child who must file a tax return is taxed using the Trusts and Estates rates – which could result in a higher tax on child’s unearned income like interest and dividends.
The U.S. stock market has jumped since the November 8th election. We identified 4 initiatives on which the U.S. stock market is speculating to be successfully accomplished early in the Trump administration. What will happen next? It is still to be determined!
The 4 initiatives will have a tremendous influence on the “Heat Map” which forms the basis of our forward looking view of the U.S. economy. We consider the success or failure of the 4 initiatives to be “leading” indicators for the Heat Map.
Below are the 4 Trump administration initiatives upon which the stock market is speculating and what progress, if any, has been made:
Tax cuts and tax reforms benefiting most individuals and businesses. THE MOST SIGNIFICANT TAX LEGISLATION IN A GENERATION WAS SIGNED INTO LAW LAST YEAR. CUMULATIVE PROGRESS TOWARD GOAL: 100%
Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years. PROGRESS MADE ON TAX REFORM POINTS TOWARD PROGRESS IN THIS AREA, TOO. CUMULATIVE PROGRESS TOWARD GOAL: 35%
Affordable Care Act amendment, reform or reorganization. THE TAX REFORM LAW REMOVED THE REQUIREMENT EACH INDIVIDUAL OBTAIN HEALTHCARE COVERAGE. PROGRESS TOWARD THIS GOAL IS 35%.
Roll back of government regulations and Executive Orders considered to be difficult for businesses. ROLL BACKS HAVE CONTINUED. CUMULATIVE PROGRESS TOWARD GOAL: 55%
As the action happens in Washington on these 4 initiatives, don’t be surprised if the political “tug and pull” contest results in a wilder than normal stock and bond market.
We will continue to report in future issues on the progress on each initiative.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is A+ (extremely favorable). Consumer spending is expected to strengthen as individuals with lower tax rates spend their windfalls.
THE FED AND ITS POLICIES: This factor is rated C- (Below average).
BUSINESS PROFITABILITY: This factor’s grade is A- (very favorable). Corporations are in the midst of releasing 4th quarter earnings. Earnings season has been stellar, with S&P profits growing at a fast pace.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 5. These risks deserve our ongoing attention.
Last week, U.S. Stocks and Foreign Stocks and Bonds all decreased. During the last 12 months, STOCKS outperformed BONDS.
Returns through 2-2-2018
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
-.9
-1.8
1.5
.9
1.9
3.6
US Stocks-Standard & Poor’s 500
-3.8
3.4
23.5
13.3
15.2
9.4
Foreign Stocks- MS EAFE Developed Countries
-2.8
3.6
25.6
8.7
7.4
3.1
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
