At the time we wrote the overview last quarter, we had just begun a market correction that took the S&P500 down from an all-time high of 1988 to 1909 by August 7th. During the balance of August and into September the market turned again and the S&P500 achieved another record high above 2000 for the first time. As of this writing, we are again correcting and the market is down about 4% from its peak. The market has pulled back 4% or more six times in the last 15 months. This action is normal and we continue to view the backing and filling and consolidation of gains as healthy. The dips are being bought and should be considered an opportunity rather than a reason for concern.
September and October have not been kind to the market generally. September is the worst month for the market historically and October is the most volatile. We expect the current corrective action to be relatively short lived and shallow. We expect the current pullback to set us up for a solid end to the year.
When you look at rolling six month periods since 1950, November through April has been the best averaging a return of over 7%. Any further downside in the near term may set us up nicely as we enter the best six month period for the market. Another interesting note is that the November through April timeframe is not only the best on average historically but, has averaged a return of over 16% during the third year of a Presidential term.
Back to fundamentals: It is our opinion that it is highly unlikely that a bear market can develop when fundamentals are as good as they are now and when valuations are not extreme. The forward price to earnings ratio is just above 16. Yes this is higher than the last few years after the bear market which ended in 2009 but, it is still below the fifteen year average and valuations are considered “fair”. When markets are fairly valued that is not a sign of a near term bear market or bubble.
We have said that the fundamentals always win so here are some more facts.
• Second quarter corporate earnings were up 9.9% year over year versus an expectation of 6.6%. This quarter earnings are expected to be up 8% or more year over year.
• Stock buybacks are down a bit as businesses have dramatically increased the amount of their capital spending putting their cash reserves to work investing in new capacity. This is a sign of increased economic confidence.
• Second quarter GDP expanded to 4.2%
• New homes sales were up 18% in August to a six year high and residential construction was up 8% over the previous year.
• Gas prices are down which will allow for more consumer disposable spending
• With all the uncertainty, gold prices are not rising and interest rates remain in a fairly narrow range. There is no sign of panic or flight to quality.
Bull markets do not die of old age. They do not die due to geopolitical events of which we have many. Bull markets only die based on the expectation of a looming recession. With interest rates low, corporate earnings at fair valuations and growing, an improving economic outlook domestically and plenty of liquidity available to the market, we remain bullish intermediate and longer term.