Market Update November 20th, 2018

Hang in there. We still anticipate new stock market highs in 2019.

In my last update on October 28th, the S&P 500 index had just hit its low of this correction at 2641. Stocks then rallied 6.5% to 2813 on November 7th. Today the S&P 500 closed at the exact same 2641 previous low of October 28th. We also finally see some signs of “waterfall selling” that usually tells us we’re near a bottom, so hopefully this was the successful test that sets the stage for a market rebound.
Markets remain in the washing machine they have been in all year, with this latest (and I think last) stage of this rolling correction finally taking down the previously invincible growth stocks (Amazon, Apple, Facebook, Netflix, Alphabet, Nvidia, etc..) as well as other speculative bubbles like bitcoin and marijuana mania. That’s why I think this second 10%+ correction of the year has been cleansing and healthy, and should create a solid base for the next market up-leg.
This is the now the fourth 10%+ stock market correction in the last 38 months. And the last time we had two in one year like this (2015/2016) the S&P 500 rallied 57% over the following 2 ½ years (from the 2/12/16 bottom through the 9/20/18 peak). Now we’ve again had back-to-back 10%+ corrections in the last 9 months, which I think further increases the likelihood of an extended market rally going forward.
A lot of negatives and worries have emerged or re-emerged all at once, causing a tremendous amount of negativity right now. (The Fed’s aggressive stance on interest rate hikes, the tariff wars dragging on, oil prices free-falling from $76 to $53, China growth slowing, final stage Brexit fears, worries that the economy, earnings growth and stock markets all may be peaking, etc., etc..)
So why am I still almost as bullish and optimistic as I was during the previous six 10%+ corrections we have been through during this nine year bull market? Because I don’t think this time is that different. All we need is some stimulus to get the tide turned. And what could go right? A) The Fed seems likely to at least soften its stance on rate hikes. B) The tariff situation seems likely to improve (eventually). C) Several key foreign economies seem likely to stabilize and resume growth momentum. D) The economic impact of Brexit or no Brexit is likely to be far less negative than feared. D) Oil prices (and energy sector earnings) are likely to stabilize and recover. E) I think U.S. economic and earnings growth is likely to be more sustainable than currently feared or anticipated.
And for those of you interested in more of my reasoning (and who can actually make it to the end of my updates):
The two most important pre-recession indicators (leading economic indicators and slope of the yield curve) continue to suggest that the economy is not likely to enter a recession any time soon. The index of leading economic indicators increased .5% last month, with eight of the ten components advancing. The year-over-year LEI gain of 7.0% is the highest annual rate of gain since September 2010. The yield curve between 90-day and 10-year Treasury yields remains positively sloped by 82 basis points, indicating low risk of recession and bear market.
Corporate earnings are up over 20% this year, and the stock market is flat. And despite all of the recent downbeat rhetoric and fretting over rising interest rates and tariffs, analysts haven’t deflated their strong earnings estimates for either the fourth quarter (+9.4% consensus) or for all of 2019 (+10.2% consensus).
We know the stellar corporate earnings growth has been boosted by tax cuts, but top-line company revenues are also up nearly 10% this year, so this is more than bottom line earnings gains from tax cuts.
The forward 12-month P/E ratio on the S&P 500 is now 15.5, which is below the 5-year average (16.4) and the 30-year average (17). And inverting the P/E ratio gives us a forward “earnings yield” on the S&P 500 of 6.4%, which still compares very favorably versus today’s 10-year treasury yield of 3.06%.
Lower corporate tax rates are not a one-time stimulus. They are a continual stimulus.
Corporate stock buy-backs continue on a mind-numbing pace, on a path to $1 trillion this year.
Yes interest rates have risen enough to at least make safe havens more tolerable if you feel the need to trim your stock positions in order to sleep better at night. However, we continue to tread very carefully when it comes to bonds. Bonds are now in a bear market, and they have been for much of the year. Something that hasn’t received hardly any press coverage. We believe the great bond bubble has only begun to deflate, so we continue to avoid all but short-term bonds and bond funds for now.
I understand that there are many potential worries, but there is also a long list of reasons to be optimistic about the stock market. In fact, I can’t remember very many times over my 30-year career where the fundamentals were more encouraging.
Happy Thanksgiving!