April 26, 2019
Making Cents of the Markets
Be in the Know
The stock markets have staged an impressive rally this year, and they are now getting back to their previous highs from September last year. Earnings have been pretty good so far, which is helping. At the start of earnings season, consensus expectations for the S&P500 were for a 2.5% contraction in earnings-per-share (EPS). Consensus expectations have now moved into positive territory at +0.5%, with under half of the companies left to report! Those numbers will likely get better too, if we continue to get beats on the bottom line. For the week, the S&P 500 returned 1.2% while the TSX was flat.
The Bank of Canada (BoC) had their monetary policy report on Wednesday, and as expected, they left rates unchanged at 1.75%. In terms of surprises, they did end up abandoning their bias for higher interest rates, and cut 2019 GDP growth forecast for Canada to 1.2% from 1.7%. The BoC did note that growth should rebound in 2020 and 2021 back to 2.1% and 2.0% respectively. With the Canadian consumer clearly over indebted, hiking interest rates at an uncertain time would not be welcome. The reasons for the dovish tone were cited as slowing global economic growth, trade tensions, and housing market weakness.
After a big earnings week, on Friday we had some more positive confirmation from the first quarter read on US GDP. The report blew past expectations coming in at 3.2% annualized growth vs 2.5% expected. Analysts had this number pegged around 1% back just a few months ago, citing the government shutdown, extreme weather, and a slowdown in major global economies. Throw all of that out the window, apparently. The headline number was boosted by some one-line items that could revert down the road, but overall, a strong and bullish read on the US economy.
When we said we expected to see new highs in the stock market this year, we surely didn’t think we’d get there just after Easter weekend, but here we are. It took just 95 days to get to the low on December 24, 2018, and only 120 days to get back to closing highs. An incredible reversal of fortunes, but was it abnormal? Our friends at Bespoke Investment Group did a study from the end of WWII on how long it took after a 10%+ decline from all-time highs to go above those prior highs. Of the 21 periods that this happened, the median number of days to breaking prior highs was 197 – not too much longer than what we just experienced – and there were 7 periods where the highs were reclaimed faster. What makes the 2019 rally impressive, though, is how far the market recovered from the bottom.
So where does the market go from here? The million dollar question. While we cannot predict for sure, things are looking much better now than they were in late 2018. There is a likely trade deal on the horizon with the US and China meeting again next week to potentially draft a deal, the Chinese economy appears to have put in a bottom, the US came in with a big beat on first quarter growth on Friday, Brexit has been kicked down the road, and corporate earnings are exceeding expectations. In reality, if the world’s two largest economies in the US and China are flourishing, it should lift most boats. Europe still remains a weak spot, especially Germany, which we will have to keep an eye on. The tailwinds continue to outweigh the headwinds, however.
One thing we should note is that new market highs are not something to be scared of – in fact, statistics point to the opposite. As we hit new highs, sentiment improves and more money tends to come into the markets from the sidelines. And when we look at the aforementioned 21 periods where markets corrected and then printed new highs, the average forward performance is not scary at all. Six months after the highs the return for the S&P500 averaged 4.8% with 75% positive readings, and one year forward the market was 9.1% higher on average with 84% positive readings, according to Bespoke Investment Group.
Chart of the Week
US GDP growth blew past expectations of 2.5% for the first quarter, with the first read coming in at 3.2% on Friday:
Beyond the Markets
From April 27 to May 5, experience Vancouver’s third annual Opera Festival featuring this year’s theme of Fairytales and Fables. The Festival will be premiering Brian Current’s The River of Light, however, you can also catch Rossini’s La Cenerentola (Cinderella) and Gounod’s Faust. Or if you prefer, come down to the Queen Elizabeth Theatre Plaza on April 28 for Party on the Plaza, a day of community stage performances, tours, and workshops!
Click here to find out more.
Listen to this week’s Making Cents of the Markets on CKNW. Our team’s very own John McLean gave listeners an earnings update, as well as discussed interest rates and debt levels in Canada. Listen here.