Week 26 Sitrep

The S&P 500 Index celebrated new all-time highs last week closing up 2.22% for the week. Strangely, the mood in the market doesn’t seem to reflect that we are up 18.87% for the calendar year. The media headlines still reflect a gloomy outlook that recession is on the horizon and that we have much to worry about with trade wars, tariffs and companies issuing warnings about earnings. I guess we should expect that as we enter election season with a sitting president that is considered “unpopular” in the eyes of the media. However, the story of the stock market in 2019 actually tells a different story.


Source: J.P. Morgan Asset Management, 6/24/2019


All the major indexes are reporting year-to-date gains of at least 10% as we approach the midpoint of the year. Even gold and precious metals have recently broken a 6-year slump to show some positive momentum. Jason Goepfert of SentimenTrader reports that the recent streak of sideways movement in gold is nearly the longest streak in 40 years.1 The recent move higher in stock indexes is comforting as we survived another “tariff test” in the month of May which saw the U.S. negotiate a favorable trade deal with Mexico and hopes of a successful meeting between the Chines and U.S. presidents this week at the G-20 meeting in Osaka. Both small and large company growth stocks led the way higher last week as they have done all year.


Source: J.P. Morgan Asset Management, 6/24/2019


Although the S&P 500 recorded a new high this week, we have seen the index in a fairly flat pattern since the middle of 2018. Bespoke Investment Group notes that the last time the S&P 500 moved significantly higher was from 2017 into early 2018. The evidence for this pattern is obvious when you see the chart for the S&P 500 200-DMA (an indicator that averages the price movement for the index over the last 200 days – DMA stands for “Daily Moving Average”).2


Source: Bespoke Investment Group, The Bespoke Report, 6/21/2019


This has been a common pattern since the bull market began in March 2009. Most recently, the S&P 500 was able to move above the closing prices we saw in April 2019. However, the new all-time highs are only moderately better than the highs we saw in August 2018 and January 2018. It’s important to realize this is a very normal long-term pattern for a bull market.3 The index will frequently experience a sideways move (market term: consolidation) after an extended upward trend. Bespoke shared the charts below to demonstrate:


Source: Bespoke Investment Group, The Bespoke Report, 6/21/2019


The key question is what to expect from here: does the market experience the next leg upward or do we continue the consolidation of the last 12 months? Recent market evidence is encouraging for stock market bulls. Despite the return to new all-time highs, the market has a favorable valuation measure (meaning the market is not considered super expensive).4 The most common measurement of valuation for stocks is the P/E ratio (price/earnings). Based on expected earnings for 2019, the S&P 500 is trading at a forward P/E ratio of 17.5 while the 100-year average for P/E is near 15. For comparison, the P/E near the end of 2007 and 2000 were in the upper 20’s and over 30 respectively.5


Source: Bespoke Investment Group, The Bespoke Report, 6/21/2019


Additional evidence that the market could continue to move higher is a technical trend we have witnessed in the last few months. More stocks within the S&P 500 index are participating in the rally. Nearly 20% of all stocks made new all-time highs last week and stocks trended above that number earlier in the month of June.6 We commonly watch the Advance/Decline Line to measure the number of stocks advancing in price relative the number of stocks declining. That measure has also recently hit new all-time highs, which is typically a bullish indicator for stocks.7 The broad-based sectors also reflect this strength, according to Bespoke, with seven of twelve S&P 500 sectors also recording new highs since April 29th.


Source: Bespoke Investment Group, The Bespoke Report, 6/21/2019


Finally, we should mention that support for the stock market move last week came largely from the Fed meeting which concluded on Wednesday, June 19th. While the Federal Open Market Committee did not change interest rates at this time, they did indicate a more accommodating stance which could lead to an interest rate cut at their July 2019 meeting. A reduction in short-term interest rates would alleviate the pressure from the inverted yield curve discussed in last week’s Sitrep.8


Source: Bespoke Investment Group, The Bespoke Report, 6/21/2019


Overall, inflation concerns remain low with core CPI rising 2.0% year over year. The low inflation and low interest rates typically support continued growth in the economy.9 Importantly, low interest rates have been shown to support higher P/E ratios for the stock market as well.10 Many analysts believe that the current risks in the stock market relate to the ongoing trade negotiations between the U.S. and China. Our investment committee continues to focus on significant downside risks to your portfolio. A recent quote from Jeffrey Saut, former Chief Strategist for Raymond James, reminded us of the reason for this focus (emphasis mine):

Another old market mantra is, “If you missed the 20 best stock market days your total returns fall dramatically, therefore you should stay in the market and take the bad with the good.” I guess this is probably true if you live long enough. However, the ~48% stock market decline between January 1973 into the December 1974 bottom took the D-J Industrial (INDU/26719.13) until 1982 to get back to where it was in January 1973. So, here the truth. If you missed the best 1% stock market sessions your returns decline from 7% to ~4.9% per annum. Yet if you missed the worst 1% sessions, your stock market returns soar to ~19% per year. That proves that if you can manage the risk and learn when to play hard and when to not play so hard, and to raise some cash from time to time, your returns explode. Moreover, you will sleep better at night.

If you’d like to schedule a time to discuss your portfolio or the markets in detail, please feel free to call our office at (281) 616-5935. We welcome the opportunity to sit down with you and learn more about your situation so we can help you optimize your portfolio to meet your financial goals for years to come.

Engrave Wealth Partners Investment Committee

Bill Day, CFP®, CIMA

Taylor Parker, CFP®

Greg Parker

1. Quoted by Jeffrey Saut, Saut Strategy, June 24, 2019
2. Bespoke Investment Group, The Bespoke Report, June 21, 2019
3. Bespoke Investment Group, The Bespoke Report, June 21, 2019
4. Jeffrey Saut, Saut Strategy, June 24, 2019
5. Bespoke Investment Group, The Bespoke Report, June 21, 2019
6. Bespoke Investment Group, The Bespoke Report, June 21, 2019
7. Jeffrey Saut, Saut Strategy, June 24, 2019
8. Bespoke Investment Group, The Bespoke Report, June 21, 2019
9. J.P. Morgan Asset Management, Economic Update, June 24, 2019
10. Bespoke Investment Group, The Bespoke Report, June 21, 2019