Interest rate cuts and rising hopes for a trade deal between the United States and China are boosting confidence in the financial markets and creating fertile ground for investors who have stayed the course in the equity markets. As earnings season wraps up, the Winch Financial investment team is pleased with its current portfolios, which are well-positioned to take advantage of this extended bull market. The S&P 500, Dow Jones Industrial Average and NASDAQ Composite all have been trading at record highs recently as investors get a more positive picture of American corporations’ health. Additionally, the fact that the U.S. and China are close to finalizing a Phase One trade deal is a positive step and has changed market perceptions regarding the trade war. The low interest rate environment is also providing a bullish backdrop for stocks. After underperforming during the year, emerging markets are also starting to perform better. Although stock valuations are starting to extend, many still offer favorable risk/reward tradeoffs, which allow tactical investors like us to find even more solid investment opportunities. Of course, a pullback is always possible, especially when so much of investor sentiment is driven by headlines. We will be monitoring those factors carefully. It is equally likely that those investors who have trailed the market this year will be playing catch up before the end of the year, which will lead to some performance-chasing support for the market and a potential year-end rally. As always, our team will be analyzing these market factors closely and adjusting our portfolios as they deem necessary.
Historic bull market
Clear it up Fridays: The Dow vs. The S&P
While it’s the oldest and most familiar index, the Dow Jones Industrial Average is not the largest and, due to the way it weights its companies and to the limited amount of companies it represents, it may not provide the best representation for how the U.S. stock markets are faring. With only 30 stocks, all of them blue chip industrials, the DJIA includes familiar companies like Johnson & Johnson, Coca-Cola and McDonald’s. By contrast, the S&P includes 500 companies with a market cap of $5.3 billion or more. Historically, the Dow and the S&P have been almost perfectly correlated, meaning they move in the same direction on virtually every trading day. Recently, though, the two indices have been tracking differently, with the S&P 500 YTD returns around 7.41% relative to the Dow at 4.28%, according to Factset. The two indices weight their companies differently, with the S&P weighting by market cap, meaning that bigger companies make up more of its value, and the Dow weighting by price, meaning that a change in the price of one stock has the same impact to the Dow as a change in the price of another. The prices are equally weighted on the Dow. A third index we track closely is the Nasdaq Composite, which includes more than 3,000 stocks that are weighted by market capitalization. More than half of the companies listed on the Nasdaq are tech stocks, and, unlike the Dow and the S&P, the Nasdaq includes some foreign-based companies. All three indices have enjoyed unprecedented success in recent years. According to MarketWatch, since March 9, 2009, which marked the low of the financial crisis and which many consider the birth date of the current bull market, the S&P has advanced 320%, the DJIA has risen 290% and the Nasdaq is up has soared 520%.
Clear it up Fridays: An historic bull market
Next week, you’ll be hearing a lot about an historic bull market. That’s because most analysts agree that on August 22, the stock market is likely to have avoided a 20% or more decline from on a closing basis for 3,453 calendar days making it the longest bull market in history. This calculation tracks the current bull market from March 9, 2009. On that day, the Dow Jones Industrial Average lost 80 points, or 1.2%, to end at 6,547.05, its lowest point since April 15, 1997. The S&P 500 index lost nearly 7 points or 1%, to end at 676.53, its lowest point since Sept. 12, 1996, and the Nasdaq Composite lost 25 points or 2%, to end at 1,268.64, its lowest point since Oct. 9, 2002. Since March 9, 2009, the market has not dropped 20% from its closing day high. A correction is defined as two consecutive quarters of negative GDP growth. While we celebrate this historic milestone, we’re also keeping an eye on factors that might signal a potential slowdown. The spread between the two-year treasury and 10-year treasury appears to be tightening, which can be a leading indicator for a recession (which is defined by two consecutive quarters of negative GDP growth). The market breadth is also very narrow and mostly due to the strong performance of the FAANG stocks. (Facebook, Amazon, Apple, Netflix, and Google). New home sales appear to be slowing down. Student loan and consumer debt is expanding. With strong earnings, low unemployment and a healthy economy, we remain cautiously optimistic that the record bull run will continue.