Despite various market challenges, look for more gains to come
Friday was the last trading day of the first quarter. The S&P’s 13% gain since January 1 marked the best quarterly performance since 1998.
So, where do we go from here?
With this question in mind, let’s turn to some of our analysts for their take. As you’ll see, even though they all have unique approaches to the market, they’re all eyeing more gains to come.
Let’s jump in.
***John and Wade are seeing the earnings growth slowdown as just a part of a regular bull market
John Jagerson and Wade Hansen are expert technical analysts. But in Strategic Trader, they also include fundamental analysis in order to provide subscribers with a complete view of the markets. From their update last week:
Has the market reached a point at which the bad news outweighs growth and hiring numbers? Because fundamental trends have been decelerating, this isn’t an unreasonable worry.
However, based on prior bear markets, growth — on a trailing 12 months basis — usually needs to be negative before a turning point is reached. As you can see in the following chart, earnings growth rates are still very positive.
Although the press has been particularly negative, the current drawdown looks like a normal bearish divergence. These occur regularly in bull markets but usually pause at the pattern’s midpoint.
If we just stick with the historical odds, this is the scenario that is most likely to play out.
***Despite some concerns, Ken Trester is looking of more gains since it’s usually a losing bet to fight the Fed
With decades of experience reading markets and charts, Ken is the editor of Power Options Weekly. On Friday, he updated his subscribers with his most recent market analysis:
My indicators continue to give sell signals this week as the bulls and bears battle it out at the 2,800 level on the S&P 500. The index has been consolidating between 2,800 and 2,825 for the past three sessions, and it’s anyone’s guess where it is going to move next.
Personally, I am leaning towards the bullish side. We have a Federal Reserve that is dovish and willing to keep the federal funds rate steady for the rest of 2019, market breadth (the ratio of advancing stocks to declining stocks) is healthy and the major indices remain above their major moving averages.
Ken then goes on to point toward some risks facing the market. He identifies rising inventories, which indicate that consumers are buying less goods than are being produced.
He also highlights Europe, which appears on the verge or a recession, as well as slowing growth in China.
Finally, Ken points toward a slowdown in earnings growth rates (which you’ve heard mentioned from both Louis Navellier and Neil George). Expectations for the first quarter are low. But Ken tells us this might actually be a good thing, since a low bar could lead to positive earnings surprises.
Despite the risks, Ken’s final takeaway is bullish:
While the market continues to consolidate at a potential inflection point, it’s important to keep the risks outlined above in mind. But it’s usually a losing proposition to bet against the Fed and the action in the market, both of which are leaning towards the bullish side right now.
***Meanwhile, Neil George is looking at strong consumer spending as a bullish indicator
Neil is our resident income-investing expert. Whether through quality dividend stocks, bonds, REITs, or MLPs, Neil helps subscribers find safe income in the markets through his Profitable Investing newsletter.
On Tuesday, Neil pointed toward a handful of positive signs for the market:
The U.S. economy continues to provide good underpinnings for the stock and bond markets.
Feeding that expansion is consumer spending, which is a byproduct of consumer confidence. The Conference Board released their consumer confidence survey results this morning.
It’s all bullish from the consumer end, if slowing a bit.
Meanwhile, I’ve been tracking and reporting the expectations for capital spending by U.S. business leaders, as surveyed by the Federal Reserve Bank of New York. It also remains in bull mode.
U.S. bonds remain popular, and rates remain very attractive. This is supporting lower corporate borrowing costs and helps the general stock market as companies grow without paying a premium.
***Louis Navellier is pointing toward weakness around the globe as a tailwind for the U.S. market
That’s the take from famed investor, Louis Navellier, the editor of Growth Investor. In his update from last week, he pointed toward a slowing global economy and declining sovereign yields. The effect of this?
The U.S. remains an oasis, as our interest rates and GDP growth forecasts are still higher than much of the rest of the world. In fact, the rest of the world has low to negative interest rates. Countries like Austria, France and Germany will likely have negative rates for a few years. In regards to GDP growth, Brexit has created a big mess for the U.K and Europe — and it’s negatively impacting economic growth across the pond.
Though Louis thinks the opportunity set of winning stocks will be narrowing in 2019, he’s still bullish on U.S. companies with strong earnings.
***Now, in all this bullishness, aren’t we missing something big? What about the yield curve inversion from this week? Isn’t that a bearish sign?
For any readers who aren’t aware, last week, the yield curve inverted.
Let’s make sure we’re all on the same page about what this means.
The yield curve is a graph that shows the interest rate yield on bonds (of the same quality) over varying maturities. Most of the time, the shorter maturities have a lower yield than the longer-dated maturities. This makes sense — investors typically expect a higher return in exchange for tying up their money for a longer period.
When the yield curve inverts (short term rates are higher than long term rates), many investors see it as a sign of trouble. That’s because they interpret it as meaning there’s more risk in the short-term than the long-term. They see it as a sign of a looming recession.
For an alternative take on the yield curve, let’s turn to Matt McCall. Matt is the editor of Investment Opportunities, where he tracks the major trends that are reshaping our world and our investment markets.
The yield curve — especially an inverted yield curve — is a legitimate economic indicator. We shouldn’t dismiss it.
At the same time, it’s not as simple as the headlines make it out to be. Nothing ever is …
Before we go any further, let me make two critical points: First, a recession is not a given. And second, even if one is coming, all indications are that it’s still a ways off … meaning stocks remain your best bet for building wealth.
Matt points toward two important things to remember for context. The first is that that there are many short- and long-term interest rates out there. The one that inverted was the 10-year relative to the 3-month. But Matt believes the 10-year and the 30-year is far more important — and that yield hasn’t inverted. In fact, the spread between those two yields is increasing, which is healthy.
Let’s go back to Matt to explain the second important piece of context:
You have to look at which end of the yield curve is moving.
In this particular case, the yield on three-month Treasuries is moving higher more than the 10-year yield is falling.
There’s a very simple explanation for that: The Federal Reserve has raised interest rates nine times in a little over three years.
The Fed has much more control over short-term rates. Long-dated yields are more market driven.
***Wrapping up, the collective take from our analysts suggests more gains to come
While the market isn’t free of warnings signs (it never is), the collective takeaway is clear — stay long. Though the market could prove more challenging as 2019 unfolds, more gains are likely coming.
Have a good evening,
Jeff Remsburg
