The U.S. equity markets have amassed unprecedented gains in the first nine weeks of 2019. The S&P 500 and Dow Industrial Average both rose 11%. The tech-heavy NASDAQ improved by 9%. The Dow and NASDAQ have yet to experience a weekly decline in 2019, while the S&P 500 has posted gains in eight out of the nine weeks. These advances followed the precipitous 2018 4th quarter drop of 20% off the September highs. After such a rapid rise in stock prices, the markets could be due for a short-term pull back of 3-5% at some point.
Haven Wealth Group has several reasons to be optimistic about the equity markets in 2019. Our reasons include the Federal Reserve’s change to a more data dependent monetary policy, possible easing of U.S./China trade tensions, better than expected fourth quarter earnings and moderate stock valuations.
The Federal Reserve has softened its stance on future interest rate increases and may halt the reductions of its balance sheet assets, both of which are positive signs for the market.
The U.S./China trade talks have ramped up prior to the March 1st deadline. President Trump announced Sunday, he has dropped the threat of raising tariffs to 25% from 10% on $200 billion in Chinese goods. Markets are anticipating a deal will be made soon, which suggests progress is being made. However, markets may sell off if a deal is not reached or if the deal is not substantive enough.
89% of the S&P 500 companies have reported 4th quarter results. There were two significant surprises in the reporting period: 69% of companies reported better than expected earnings per share and 61% had higher revenue than forecasted.
Stock valuations are a key indicator for potential growth in the equity markets. Valuation is simply the price people are willing to pay for stocks. The normal valuation range over the last 93 years has been 17.2 times GAAP earnings. Today, the S&P 500 is trading at 18.1 times projected 2019 GAAP earnings. This estimate is close to historical averages, which means that current stock prices are in line with projected earnings.
Equity markets have continued to rise despite the uncertainty of trade wars, Brexit and disappointing retail sales. The market is currently trading at reasonable valuation levels, as compared to current and expected earnings. While volatility could rise at any time, we believe the downside risk is much less than what was experienced during the 4th quarter of 2018 when pessimism was high.
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Haven Wealth Group Team