This current period of market anxiety really started with the meltdown and VIX spike that began late January ’18. This followed a remarkable period of calm from Q1 ’16 through January ’18 where the SP 500 returned roughly 12.5% in 2016 and 21.5% in 2017 (for a 2-year return of roughly 35%), with not much market-driven anxiety during the 24 month period.
Now we’re getting the “angst” and the worry as President Trump’s unpredictable and maybe ultimately necessary tweets send the major equity benchmarks reeling.
Let’s just look at the corrections of the last 18 months:
January ’18: The SP 500 peaked at 2,872.87 on January 26th, and bottomed on February 9th, 2018, at 2,532.69 for an 11.8% correction over a 12 – 13 day period. The VIX spiked sharply from 10-11 to 50 over the same period, and then the SP 500 rallied off the February 9th low, re-tested some of the support on April 2, 2018 and then started to steadily move higher through September ’18. Looking at high-yield, via the HYG chart, the junk-bond market actually peaked in July ’17, and steadily bled lower until late Jan ’18 where it spiked lower (prices fell sharply and yields spiked), bottoming in early February ’18 near $85, and then held $85 until the summer of 2018. Maybe more interesting was that the dollar (UUP) bottomed with the January, 2018, high for the SP 500 and then gradually strengthened despite the capital markets weakening or becoming more anxious. The Fed was very much still on its tightening bias, and at least several rate hikes were predicted for 2018.
September ’18: The SP 500 rallied off the February 9th and April 2nd, 2018 lows and slowly and steadily rallied higher until the SP 500 peaked at 2,940.91 on September 21, 2018 and then quickly started to unravel after October 1, 2018. During the trek from the February 9th, 2018 lows of 2,532 through the Sept. ’18 high tick, Apple hit $231, Facebook hit a high of $218 – $219, and Tech traded very well up until that September ’18 high.This SP 500 correction lasted three months or 90 days, bottoming on December 26th, 2018 at 2,346.58 for a peak-to-trough correction of 20.2%, and then rallied sharply into the year-end 2013, with the SP 500 returning roughly -13% for the quarter and -4% for calendar 2018. The catalyst for the rally was Jay Powell softening on fed funds rate hikes after the last one in December ’18 brought fed funds to 2.25% – 2.50% range. The trade rhetoric between President Trump and Xi had really escalated by now, Brexit continued to be a complete mess, and there were some signs of the US economy weakening (although there is always some aspect of the economic data that supports either the bull or bear case.) The VIX bottomed on October 3rd at 11.34 and rose to 36 by Christmas of 2018, only to start to recede with the Powell comments in late December ’18. The HYG corrected from $86 down to the $79 area in Late December ’18, correcting about 10% in price.
May ’19: Thanks to a Presidential tweet, the SP 500 peaked on May 1 ’19 at 2,954.13 and then bottomed on June 3rd at 2,720.81, for a 7.9% correction that fit the month of May ’19 almost exactly. The VIX spiked from 12 – 13 to a high of 21 by mid-May ’19 and even though the SP 500 continued to sell off intl the first trading of June, the VIX never exceeded its May 13, 21.32 spike high. The dollar made a new multi-year high in May ’19 (UUP) and then sold off into June ’19. The HYG lost $2 for the month of May ’19 but stayed above the 200-day moving average. There is no question that by now the FOMC and Powell had softened the monetary policy rhetoric, although there remained an active debate among prominent economists as to whether a fed funds rate reduction was even needed.
July ’19 ? Supposedly the SP 500 had its worst week in years the last 5 days as the SP 500 peaked at 3,027.98 on July 26th and closed Friday, August 2nd at 2,932.05, below the May and June ’19 highs, but resting just above the 50-day moving average at 2,927.54. The VIX closed Friday, August 2nd at 17.51, which is still lower than the May ’19 correction spike in the VIX, above 21. The dollar looks like it wants to weaken rather than strengthen, and high yield was down a little on the week.
So what’s the point ?
The only aspect of the trilogy that took down the long market rally from Q1 ’18 to Q1 ’18 – stronger economy despite Fed tightening, China trade and tariff issues and Brexit (some might not think Brexit is a big deal, and shouldn’t be included here, but the UK is the world’s 6th largest economy and the EU as one single economy that includes Germany and the UK is probably as big or bigger than China) – the only factor that has changed is that the US now has an easier monetary policy.
The earnings data was inadvertently omitted from the Saturday blog update:
SP 500 data (by the numbers): Source: IBES by Refinitiv
- Fwd 4-qtr est: $172.88 vs last week’s $173.98
- PE ratio: 16.9x
- PEG ratio: 3.15x
- SP 500 earnings yield: +5.90% vs last week’s 5.75%
- Y/y Growth of the fwd est: +2.21% vs last week’s 2.96%
Summary / conclusion: Readers are now looking at the 4th correction within an 18-month period. Watch the 50-day moving average this week and see if it can hold, and watch the VIX to see if it remains contained within the May ’19’s correction high of 21.
Although high-yield and the equity benchmarks are correlated, with an easier monetary policy, it’s hard to fathom how credit doesn’t perform well, particularly high yield unless we are facing an ’08 type environment.
From the January peak of 2,872.87 to the July ’19 peak of 3,027.98, the total price gain on the SP 500 is 7%. With the dividend, the total return is 9% – 10% for the last 18 months or just about “average”.
Maybe this is just a normal market, as the SP 500 “walks up” the below-average SP 500 earnings growth for 2019.
The SP 500 “earnings yield” still indicates stocks are relatively cheap, but the forward “expected” growth rate for SP 500 is now near 2% (see last bullet point). That’s very low. It’s making me nervous.
Something will have to give either with 2020 earnings estimates or 3rd and 4th quarter of ’19 earnings.
Thanks for reading.