INSIGHTS

On November 01, 2018

2018 Equity Markets: Are We Double Dipping?

With the one of the most volatile months behind us, we thought it important to look at what the current market metrics mean and what has happened historically.

• According to SentimenTrader, October had 16 down days, the most in any month in 48 years. It also was the 3rd worst since 1928…90 years ago. 
  
  
  
  


• 2018 has also had two 10% corrections, a first since 1960.
  
  
  
  


• In the last 20 years, 15 years were positive, and five years saw a negative return in the S&P 500 during November and December. 
  
  
  
  


• In mid-term election years (2014, 2010, 2006, 2002, 1998), November and December S&P 500 returns had only one year which was negative, and that was -0.33% in 2002. The average return in the final two months of a mid-term election year over the last 20 years was 4.84%. 
  
  
  
  


• With recent correction, the S&P 500 is trading at 15.5 times the 12-month forward earnings. This is smack dab in the middle between the five-year 12-month forward looking average (16.4 times) and the 10-year average (14.5 times). 
  
  
  
  


• While the markets have discounted what has happened, 2018 operating earnings had a distinctive increased positive impact throughout the year. The expectations for next year are estimated to be around 10% in growth. 
  
  
  
  

Source: Thomson Reuters, Yardeni Research

• The stimulus from the tax cut has its biggest impact in the first year and then is baked in. The trepidation in the markets currently appears to be on a cautious attitude on the mid-term elections and the potential for a tax cut reversal. Perhaps the largest component to look at for further stimulus lay in the deregulation environment.
  
  
  
  


• The total pages in the Federal Register has had six periods in the last 80 years when the decline was near 20% in one year. All but one of those periods were marked by economic or military calamities or anomalies. The only one in which there wasn’t a recession, economic aberration or military skirmish was in 2017. If there is a second year of regulation cuts (a rarity to be sure), increased Capex spending and investments may provide a secondary boost to economic productivity and earning numbers. On average, the number of pages in the Federal Register increase by 4.5% annually.

• As of the end of October 63% of S&P 500 companies had issued negative guidance for the 4^th quarter, below the five-year average of 70%, according to FactSet. 
  
  
  
  


• The chart below from Bank of America Merrill Lynch exhibits just how volatile the S&P 500’s 10% best and worst days have been as a ratio; the highest number in over 60 years.

• The last four quarters of stock buybacks (Q2 (2^nd quarter) 2018 ending) totaled $724 billion, a 25% increase from the previous four quarters. With stock market declines, we would expect bigger announced and executed buybacks.
  
  
  
  


• When the stealth bear market of 2015 occurred, the bottom of the S&P 500 occurred in the third quarter when quarterly stock buybacks totaled $194 billion. In 2015 a total of $652 billion was bought back, the highest level in the last decade until 2018 calendar year’s estimate. 
  
  
  
  

• Consider that the recent sell off is a global risk-off move. The Credit Suisse Global Risk Appetite is at levels last seen in 2015, with an even stronger buy signal based on­­­­ its contrarian status.

With all these metrics signaling a correction within a bull market and acknowledging we are in late-stage cycle investing, it appears allocating money to equities is still favorable. On top of that, the economic fundamentals are still positive as evidenced by job markets, consumer and business sentiment, and broad-based GDP (Gross Domestic Product) numbers. While we see some cautionary signs in corporate leverage, increased Treasury issuance to satisfy increasing budget deficits and the steady increasing rate of inflation, the positives still outweigh them. As such, we continue to favor traditional late-stage cycle industries like energy, materials, commodities, industrials and consumer discretionary. While it is difficult to invest with “disposable declarations of despair” dominating the headlines and we could have more volatility ahead, consider what Mark Twain once said: “I was seldom able to see an opportunity until it had ceased to be one.”

CRN: 2018-1101-7004 R