Concerning Lack of Concern?
U.S. stocks have now recovered their late-2018 losses in a sharp V-shaped move. We’re concerned that the pendulum has swung too far, too fast and we could be vulnerable for a near-term pullback. We would likely view such a move as healthy and investors should remain disciplined and diversified.
Economic data has been healthy enough to reduce the fears of a near-term recession, but the disconnect between weak economic surprises and the recently-strong stock market may not be sustainable. Earnings season has been mixed, while trade concerns continue to hover in the background.
China has seen some results from its recent stimulus efforts but stocks may have reacted too much in the positive direction—more time is needed to see if the stimulus efforts are really having a long-term impact on the economy (vs. just China’s stock market).
Listen to the latest audio Schwab Market Perspective.
“Well, I think we tried very hard not to be overconfident, because when you get overconfident, that’s when something snaps up and bites you.”
― Neil Armstrong
Crumbling wall of worry?
It has been a stunning reversal of fortunes for U.S. stocks. The V-shaped recovery since the near-bear market in last year’s fourth quarter has put the major indexes back to or near record. But has it been too far, too fast?
Sharp recovery in stocks …but is it too sharp?
Think of how a pendulum works. Late-last year the stock pendulum arguably swung too far toward pricing in an imminent recession; but now, the pendulum may have swung too far in the positive direction, appearing to show little concern about weak global growth, a still-sluggish U.S. economy, ongoing trade uncertainty, and weak earnings. Paramount among concerns is investor sentiment. Ned Davis Research aggregates a number of well-watched sentiment indicators into its Crowd Sentiment Poll, covering both attitudinal and behavioral measures of sentiment. It has recently moved from the extreme pessimism zone to the extreme optimism zone in a very rapid fashion—barely pausing in the neutral zone. A pullback, and the pendulum moving more toward a center point, would likely be viewed as healthy. We continue to reinforce our view that investors should not get over their skis and allow equity exposure to increase so much that it changes portfolios’ risk profiles; but instead to consider periodic rebalancing. Within U.S. equities, we continue to be biased toward large-cap stocks over small-caps due to the higher debt profile among small caps, as well as the record-large percentage of profitless small cap companies.
Economy perking up?
Some of the weakness in economic data over the past quarter or two may be ebbing given they were partly due to temporary factors, like weather and the government shutdown. Notably, two concerns about slowing growth were eased when retail sales resumed their ascent and unemployment claims resumed their descent, as you can see in the charts below.