Market Perspective. Our View After the Snapback

Transcription

1 Market Perspective Our View After the Snapback January 22, 2019 Investment and Insurance Products: Are not FDIC or any other Government Agency Insured Are not Bank Guaranteed May Lose Value Keith Lerner, CFA, CMT Managing Director, Chief Market Strategist 2018 SunTrust Banks, Inc. SunTrust is a federally registered service mark of SunTrust Banks, Inc.

2 Our View After the Snapback What Happened? After one of the worst Decembers and quarters in history, markets have come roaring back. Global stocks have gained more than 10% since Christmas Eve, and the S&P 500 has lifted nearly 14%. In late December, investor sentiment moved to a negative extreme, and prices were as stretched to the downside as they were to the upside in early January A great deal of negativity was being discounted into the market, and our work suggested the selloff was overdone. Since then, several factors have aided the market rebound including: 1) Data suggesting a recession is not imminent, such as a blockbuster employment report. While we expect US growth to moderate in 2019, there is a difference between a slowdown and a recession. 2) A more dovish tone from the Federal Reserve (Fed). Investors became concerned that the Fed would make a policy mistake by raising rates more aggressively than warranted by economic and inflation trends. When Fed Chairman Powell suggested in early January that the Fed would be patient in raising rates, this assuaged market concerns. 3) Headlines suggesting there has been some progress on US-China trade (though this remains unresolved). 4) Better earnings than expected: while corporate profit growth estimates continue to fall, the early earnings season is not as bad as feared, and the data suggests that we are still likely to see positive, albeit, modest earnings growth this year. 5) Beyond the factors already mentioned, the rubber band simply became stretched too far, and the recent action is consistent with the normal tendency for stocks to bounce back following weak quarters. Indeed, following the 20 worst quarters since World War II, stocks have been up the next quarter 75% of the time with an above-average gain of 6%. Where to Next? After the snapback, the price action over the near term is likely to become more challenging. From a price level standpoint, markets are closing in on an important area of resistance a level where we may see more enthusiasm from sellers. Many investors were caught off guard by the sharp move down late last year and will look at the rebound as an opportunity to lighten up equity exposure as they near break even. From a fundamental basis, the forward price-toearnings ratio for the S&P 500 has rebounded from 13.5x in late December to 15.5x currently. For most of last year, the 16x multiple acted as an area where buyers stepped in; however, we now expect that area to act as a temporary barrier for markets. It is also important to recognize when looking at the path after sharp selloffs during this market cycle (and prior cycles), volatility tends to remain elevated over the next few months as a battle between fear and greed takes hold. A V-shaped price recovery is always possible, but not our base case scenario. However, consistent with history, our work suggests the probability of higher prices when looking out longer term is still positive. Indeed, following the worst 20 quarters, stocks have been up one year later 85% of the time and positive 100% of the time three years later. Strong buying pressure, such as we have seen recently, also tends to be a good omen when looking out over the next year. Indeed, over a 10- day period in January, the number of S&P 500 advancing stocks outpaced decliners by more than a 2-to-1 margin for only the 26th time since 1990 (excluding clusters). One year later, stocks climbed in 25 of those 26 instances, with an average gain of 12.6%. Bottom Line Just as we advised investors to keep on an even keel when markets were under pressure in December, we advise the same after the sharp rebound. Our work suggests the near term is likely to become more challenging, even while the longer-term outlook remains positive. Markets do not typically move in a straight line, and we continue to expect overshoots in both directions this year. For investors with excess cash, we recommend averaging into the market over time and look for pullbacks to be more aggressive. Likewise, for investors who found they were overexposed to equities relative to their risk tolerance and exposure needed to help achieve their long-term goals, this may be an opportunity to trim back stocks at more favorable prices. Past performance does not guarantee future results.

3 Recent Snapback Consistent With Trends After Weak Quarters The S&P 500 declined 13.5% in the fourth quarter of 2018; this ranks as the 11 th worst quarter since World War II (WWII). Following the previous 20 worst quarters, stocks averaged a gain of 6% in the next quarter and 17% over the next year. S&P 500: 20 Worst Quarters Since WWII & Forward Returns* Quarter Ending Quarterly Return Next Quarter One Year Three Years Five Years Sep-74-25% 9% 38% 73% 118% Dec-87-23% 6% 17% 49% 109% Dec-08-22% -11% 26% 49% 128% Jun-62-21% 4% 31% 69% 95% Sep-46-18% 4% 6% 24% 115% Jun-70-18% 17% 42% 57% 56% Sep-02-17% 8% 24% 59% 105% Sep-01-15% 11% -20% 13% 40% Sep-11-14% 12% 30% 86% 113% Sep-90-14% 9% 31% 65% 121% Jun-02-13% -17% 0% 27% 66% Mar-01-12% 6% 0% 2% 21% Jun-10-11% 11% 31% 66% 122% Mar-09-11% 16% 50% 88% 161% Sep-75-11% 9% 30% 40% 91% Sep-81-10% 7% 10% 66% 151% Sep-98-10% 21% 28% 6% 5% Sep-57-10% -5% 23% 40% 57% Mar-08-9% -3% -38% 7% 33% Dec-73-9% -3% -26% 25% 24% Average -15% 6% 17% 46% 87% % Periods Positive 0% 75% 85% 100% 100% Past performance does not guarantee future results *Returns are cumulative and on total return basis Data Source: Morningstar, SunTrust IAG

4 Market Approaching Price Resistance Levels In late December, stocks became as stretched to the downside as they were to the upside in January Indeed, the S&P 500 moved 14.5% below its 200-day moving average price. Subsequently, much like a rubber band that gets stretched too far, the recent snapback has been sharp. 3,000 2,800 S&P 500: Daily Price & 200-Day Moving Average S&P 500 Daily Price 14.0% above 200-day moving average 200-Day Moving Average 2741 We now expect the S&P 500 s 200- day moving average and the November price high to act as a short-term barrier in the 2740 to 2810 range (versus 1/18/19 closing price of 2671). 2,600 2,400 2, % below 200-day moving average 2,000 1/17 4/17 7/17 10/17 1/18 4/18 7/18 10/18 1/19 Data Source: FactSet, SunTrust IAG

5 US Valuation Fundamental Levels Forward Price-to-Earnings During much of 2018, buyers stepped in around a 16x forward price-to-earnings ratio to support the S&P 500. However, after breaking below that fundamental level in late October, the 16x multiple served as a ceiling. We expect the top of the valuation range to stay around 16x over the near term. 19x 18x 17x 16x 16.0 When we apply the 16x valuation to the current forward earnings estimates of $172, this equates to a price level of 2750 for the S&P 500. This fundamental level coincides closely with the 200-day moving average (2,741) and price barrier discussed on the previous page. 15x 14x 13x x Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Data Source; FactSet, SunTrust IAG

6 Path After Sharp Equity Corrections During This Cycle After sharp selloffs during this market cycle (and prior cycles), volatility tends to remain elevated over the next few months as a battle between fear and greed takes hold. However, consistent with history, we expect prices to eventually move higher S&P 500: S&P 500: Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb S&P 500: S&P 500: Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Past performance does not guarantee future results. Data Source: FactSet, SunTrust IAG

7 Strong Breadth a Good Omen Longer Term Despite our expectation that the price action over the near term may become more challenging, strong buying pressure tends to be a good omen when looking out over the next year. In fact, over a 10-day period in January, the number of S&P 500 stocks advancing outpaced decliners by more than a 2-to-1 margin for only the 26 th time since 1990 (excluding clusters). One year later, stocks climbed in 25 of those 26 instances, with an average gain of 12.6% S&P Day Advance/Decline 0.0 Jan-16 Jan-17 Jan-18 Jan-19 Past performance does not guarantee future results. Data Source: FactSet, SunTrust IAG

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