Equity Rankings Bullish: Return of Goldilocks in The Economic Cycle

Investing Environment Review and Outlook – Volume 31

Equity Rankings Bullish: Return of Goldilocks in The Economic Cycle

This month we increased our U.S. and foreign developed equity rankings to a bullish 5. A number of factors changed to improve the outlook for stocks since we reduced to a neutral 3 rating in August. First, Goldilocks economic conditions returned, marked by moderate growth, a loose Fed, falling interest rates, falling inflation, and investor skepticism. Despite the political distractions of impeachment, trade war, and Brexit, the Goldilocks stage of the economic cycle is the best for stock returns historically. Since 1950, the S&P 500 returned on average 20.3% annualized with these conditions, almost twice the norm of 11.3% over that period, and returns were consistent over time. For instance, since 2005, the S&P 500 returned on average 17.0% when Goldilocks conditions were present (26% of the time) vs. just 6.4% for all other periods.
Secondly, October 1st marks the beginning of the best seasonal period for equity returns. The S&P 500 has been up 78% of the time, an average of 8.0% in the October through April period since 1950 (chart 1), including 83% of the time higher since 2000. For comparison the May-September period was up just 65% of the time since 1950 and since 2000 averaged a -0.6% decline.
Although conditions are bullish for stocks, 5-6% declines were normal in these prior periods. No one likes downside volatility in their portfolio. Expecting declines and finding the conviction to remain invested during these periods is one of the most critical parts to successful investing, and one of the focuses of our research.

Recession Scare

On 10/1/19 the September ISM Manufacturing Index dropped more than expected to 47.8, seemingly causing a 2-day 3% drop in the S&P 500. Investors focused on the probability of a recession and sold stocks. However, of the 16 prior cases when the ISM dropped below 48 since 1950, a recession followed only 50% of the time, and only once in the last 5 cases. This index is the best coincident economic indicator I have found, but it is not a leading indicator. Notably absent from media coverage was the implication for equities. In fact, after those 16 prior cases, the next 6% move was higher 81% of the time. Of the negative cases, where the S&P 500 declined by 10% within 3 months (1970, 1981, 2001), inflation was over 6% and rising in the first two, and the Fed was hiking in the last one, so they were not comparable to today’s conditions. A collapse in economic activity would likely be negative for equities, but our leading indicators, like our economic outlook model, show less than a 50% chance of a recession. As usual, if conditions change, we will re-evaluate our ratings.

2nd Fed Interest Rate Cuts: Bullish with a Lag

On 9/18/19 the Fed cut the Fed Funds target for the second time in this cycle to 2.0%. Of the 17 prior cases since 1929 when the Fed cut for the second time, the S&P 500 was down on average 2-3 weeks afterwards. This year we are following the same pattern, with the S&P 500 down 4% in the first two weeks, the second worst return of all prior cases. This may lead investors or even the Fed itself to believe Fed cuts are not working. However, from two weeks out to 2 months out after 2nd cuts, the S&P 500 was up an average of 9.5%, with 88% of cases higher. Our founder Marty Zweig coined the phrase often repeated today, “Don’t Fight the Fed.” Today it is particularly relevant.

In summary, Goldilocks economic conditions returned, therefore the environment for equities have improved significantly to warrant an increase in the U.S. and foreign equity rankings to a bullish 5. We are leaving our long-term bond, commodities and gold rankings at a neutral 3, and emerging markets remain a bullish 5. With the media louder than usual with impeachment, trade war and Brexit making headlines, it is important to realize that despite the media focus, most political events should be ignored by investors, particularly public statements which are often contradicted the next day. If political activity is significant, it will show up in our sentiment, economic or trend indicators in some form. Thank you for looking this over and please contact me or your advisor with any questions.

IMPORTANT DISCLOSURES

This review and outlook report (this “Report”) is for informational, illustration and discussion purposes only and is not intended to be, nor should it be construed as, financial, legal, tax or investment advice, of Brenton Point Wealth Advisors LLC or any of its affiliates (“Brenton Point”). This Report does not take into account the investment objectives, financial situation, restrictions, particular needs or financial, legal or tax situation of any particular person and should not be viewed as addressing any recipient’s particular investment needs. Recipients should consider the information contained in this Report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments.
This material is based upon information obtained from various sources that Brenton Point believes to be reliable, but Brenton Point makes no representation or warranty with respect to the accuracy or completeness of such information. Views expressed herein are current only as of the date indicated and are subject to change without notice.
This Report contains certain forward looking statements opinions, estimates, projections, assessments and other views (collectively “Statements”). These Statements are subject to a number of assumptions, risks and uncertainties which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward looking statements and projections. Brenton Point makes no representations as to the reasonableness of such assumptions or the likelihood that such assumptions will coincide with actual events and this information should not be relied upon for that purpose. Changes in such assumptions could produce materially different results. Past performance is not a guarantee or indication of future results, and no representation or warranty, express or implied, is made regarding future performance of any financial instrument mentioned in this Report.
Any benchmark shown herein is shown for illustrative purposes only. No index benchmark is available for direct investment. It may not be possible to replicate the returns of any index, as the index may not include any trading commissions and costs or fees, may assume the reinvestment of income, and may have investment objectives, use trading strategies, or have other materials characteristics, such as credit exposure or volatility, that do not make it suitable for a particular person. This is not an offer or solicitation for the purchase or sale of any security, investment, or other product and should not be construed as such. References to specific financial instruments and to certain indices are for illustrative purposes only and provided for the purpose of making general market data available as a point of reference only; they are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities. Investing in securities and other financial products entails certain risks, including the possible loss of the entire principal amount invested, as the value of investment can go down as well as up. You should obtain advice from your tax, financial, legal, and other advisors and only make investment decisions on the basis of your own objectives, experience, and resources.
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Source of data and performance statistics: Bloomberg L.P. and Factset Research Systems Inc.
©Brenton Point Wealth Advisors LLC 2019

Brenton Point - Careers

Michael Schaus

Director of Market Research

Michael Schaus is the Director of Market Research for Brenton Point Wealth Advisors and Zweig-DiMenna. Since joining Zweig-DiMenna in 1992, his focus has been on macroeconomic research, the analysis of…

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