Bloomberg /New York
The S&P 500 is up 16% on the year, back to a place where it has twice crashed. For stock managers who spent the last three months climbing out of their deepest hole in a decade, the temptation now is to take the money and run.
“The first quarter’s rally would have been good enough to shut the whole year down and call it a day,” said Scott Colyer, chief investment officer at Advisors Asset Management. Even so, he says, “I’m paid to be a worrier. I look hard for signs that the markets are about to roll over every day. I don’t see them.”
The options aren’t new – buy, sell or hold – but rarely has the risk of each been so starkly defined. With 71 sessions in the book, the S&P 500 is having its best start in two decades. Central banks are pushing stimulus, spurring comparisons to melt-up years like 1999.
At the same time, earnings are falling, valuations fat, the pace of global growth is slowing and a host of geopolitical nuisances remain unresolved. For investors and analysts with fresh memories of last year’s traumas, it’s a lot to ponder. We spoke to four to see if they’re bailing or buying.
Earnings Bull Earnings are the big unknown, with the Wall Street consensus calling for a 4% decline in the first quarter and no appreciable rebound until the end of the year. As always, the question for bulls is how seriously to take the forecasts.
While brief declines in earnings often beget longer ones, there’s evidence that analysts have started tempering scepticism. They now project 2019 earnings at $166.8 per share, no worse than they did in March or late February.
“Everyone knows that we’re in the midst of a slowdown,” said Ed Campbell, managing director and portfolio manager for QMA, which is overweight US stocks. “We’re now seeing evidence that forward earnings are bottoming, and that’s consistent with the first quarter marking the bottom in earnings growth. That’s a good sign.” JPMorgan Chase & Co’s strong results helped send the Dow Jones Industrial Average to its best day in two weeks on Friday.
How much more juice can be had from extra stimulus? While Federal Reserve Chairman Jerome Powell’s dovish about-face may have transformed sentiment in early January, recent pronouncements by central banks have done less to lift stocks. And while it’s true that 15 weeks of gains have erased last year’s carnage, they’ve also deposited industries in the S&P 500 at or above forward price-earnings thresholds that prevailed before the sell-off.
“This is a very expensive market,” said Michael O’Rourke, JonesTrading’s chief market strategist. “A lot of this rally is policy-driven because of the Fed pivot, so I have a hard time thinking it will be sustained throughout the year. If it’s me, I’d be taking profits.”
Other gauges also show prices getting frothy. Wall Street strategists are not a group known for restraint, having predicted S&P 500 rallies in each of the last 19 years. Right now, not even they can keep up with the speed of the rally. After climbing for the fourth time in five weeks, the benchmark is 8 points above their average year-end call.
Jeremy Siegel, the Wharton School professor who wrote “Stocks for the Long Run,” says that while more gains are possible, at around 19 times trailing earnings stocks are “pretty fully valued.” He’d lighten up on equities if the market were to jump on a headline like the resolution of the China-US trade spat.
Should the negotiations fail, on the other hand, and tariffs become permanent, it would be “a big threat to the market, it could go down 20% or more,” Siegel said on Bloomberg Television on Friday. The combination of a weakening global expansion and strengthening US currency creates even more risk.
“We have seen a slowdown in GDP growth,” Siegel said. “In a couple of weeks we’re going to get the first quarter – looks like a bit over 2. We also have a pretty strong dollar, rates are so much higher than the rest of the world in the US right now, that’s keeping the dollar strong.”
Then again, risk is never far from the market, while the momentum that has fuelled stocks since January is rare.
By this time next year, Phil Orlando, chief equity market strategist at Federated Investors Inc, expects stocks to rise a lot more, up 50% from last year’s bottom. People who worry about valuations are ignoring an important variable, he says: low inflation and low bond yields, which mean multiples can keep expanding.
“You continue to make hay while the sun is shining now, and then we’ve got plenty of time to take profits in the spring of next year,” Orlando said in an interview at Bloomberg’s New York headquarters. “Could we see a little bit of a correction here based upon the volatility of the first quarter earnings? Absolutely. Let’s say we get a five% pullback, a three% pullback. In our mind, that’s a buyable pullback.”
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