The Ingredients for an 11 for 11 Market

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Published by Scott Kubie, Senior Investment Strategist | LinkedIn

The S&P 500 is coming up on one of its longest streaks ever. November was the 11th straight month this year that the S&P 500, including dividends, has increased. We don’t know of any year where the index has increased in every month in a calendar year.

Markets that go up this strongly, go up for a reason. Eventually the streak will end. Below is a summary of “The Ingredients for an 11 for 11 Market” and a risk to each ingredient that bears watching.

  1. Solid Profit Growth

    • Earnings are growing at a rapid rate, and after tax profits, they were up 10% last year.
    • One reason that GDP is expected to remain strong is that capital expenditures are being rewarded in the marketplace, and companies are starting to notice.
    • Risk: Business model disruption pushes competition higher and earnings lower
  2. Steady Economic Growth

    • GDP continues to plug along at a moderate rate
    • Recent quarter’s growth has picked up through higher business investment
    • Risk: Productivity growth remains low, reducing potential economic growth
  3. Solid Consumer

    • Debt has been well managed, which has increased consumer confidence.
    • The savings rate has begun to decline, but so has unemployment.
    • Risk: Labor’s share of the economy has plateaued at lower levels
  4. Inflation Just Below Target

    • Inflation has been comfortably positive.
    • Strong enough for the Fed to gradually increase rates, but never threatening
    • Risk: Unemployment is very low and wages may need to increase
  5. Well-Communicated Benign Policy

    • The Federal Reserve does not surprise the market.
    • The Federal Reserve has steadily raised rates to, but financial conditions still remain loose. This return to normalcy has reassured investors.
    • Risk: Investor expectations for interest rate hikes continue to lag the Fed’s expectations
  6. Low and Declining Volatility

    • It has never been less painful to own stocks
    • Points of concern come and go with no ill effects.
    • Risk: Stability leads to riskier behavior by investors
  7. Synchronized Global Growth

    • The GDP has been increasing globally, in part due to policy choices.
    • Spain, Japan, and Italy are experiencing better growth, as well as reduced risk.
    • Risk: Chinese economic growth slows over debt concerns
  8. Great Stories

    • The FAANG stocks and technology in general have provided a great narrative for investors to buy into.
    • Index ETFs have performed very well
    • Risk: The market is somewhat expensive and valuations will begin to matter

The eight ingredients above are the reason for this 11 month historical streak for the S&P 500. Because the positive reasons above have been so consistent, the market has been able to keep producing gains month after month. This streak means that the market is behaving less volatilely than ever.[i] This low volatility and low risk has characterized 2017 as “one of the most boring years ever for the stock market[ii].” Although the stocks have remained fairly “boring,” it will be very interesting to see if this streak can turn into a record for the S&P 500 as the year closes.

 

 

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