The stock market has been climbing an especially steep wall of worry over the past three months as concerns about the yield curve, slowing growth, and international affairs have been brushed aside by a stock market that had one of its best quarters in years. And in a rather typical fashion, the market has moved further than most would have anticipated by moving down around 20% in the fourth quarter last year only to rally by a similar amount in the first quarter of this year. This increase in volatility continues to occur within the range of the past 15 months and is possibly also an indication the volatility will continue for several more months. However, even with the increased shorter-term volatility, the markets remain about at the same levels they were 6 and 15 months ago as they swing from one end of the range to another.
First-quarter earnings reporting season begins soon, and although the expectations for growth in the numbers have been reduced, much of that may already be anticipated and priced into stocks. Sometimes, lowered expectations can create the opportunity for positive surprises, so the period ahead could be very interesting. There are many opinions out there for a possibly bigger market move in either direction, but the overall trend remains the same of a volatile range.
The stock market has been in a bull market for more than 10 years now, but we think the short-term concerns continue to be the focus of most people’s attention. These concerns are serving to keep the overall sentiment of investors in a skeptical mood at best, which we believe leaves plenty of room for improvement and far from the overly optimistic levels that have often come at long-term tops. When someone thinks about what it would take to get the majority of people optimistic, they usually determine it will likely take much more time and much higher prices. The driver of stock prices is earnings, and even though the near-term expectations for earnings are softer relative to recent years, we think the longer-term trend remains positive for both earnings and economic growth. It is normal for earnings to surge and then soften for periods within an overall advance, with the lower periods providing an opportunity for those who can keep the short-term distractions in perspective.
Short term (days to weeks): Bullish. The market indexes have rallied back to the high end of their year-plus trading ranges and have reached some overbought and extended conditions based on several measures. The rally has been near record-setting by many accounts and we see it as evidence that the longer-term bull market that started ten years ago is still intact.
Intermediate term (weeks to months): Neutral. The major market indexes have been trading in a volatile fashion this year but it has all been confined to a range that has seen several bottoms and tops along the way, but little in the way of overall progress over the past fourteen months. Much of the trading range activity may be traced to the earnings growth trends for the S&P, which have been tempered back to lower levels from the larger surge in growth that we saw during 2017 and 2018.
Long term (months to years): Bullish. The Dow Industrials and the S&P have been in bullish uptrends since 2009, and this is now known as the longest bull market in history without a pullback of over 20%. We continue to believe that the U.S. stock market is close to the midpoint of a longer-term secular bull market that we expect to rise until the economy and business climate become much more improved, which could still take many more years to develop. The overall rising channel for the Dow Industrials and the S&P is about 20% wide, which allows for much movement within that large range that will likely continue to cause distraction from the longer-term bullish trend. Long-term bull markets tend to continue to rise until the longer-term optimistic sentiment becomes common among investors and the public, and we see the current conditions as being far short of that kind of attitude. Generally, a long-term secular bullish trend can continue until the majority of the public becomes much more optimistic on many levels, both domestically and internationally.