Have the Markets Now Turned the Corner?
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 03/04/16. Rates and Economic Calendar Data from Bloomberg as of 03/07/16.
Stock markets both in the U.S. and internationally continued to build momentum and posted a third straight week of gains as of the close of trading on Friday, March 4. On the home front, Small cap companies* posted the strongest gains last week, moving 4.3% to the upside but still have some ground to make up after being down 4.5% for the year as of Friday’s close. Internationally, emerging markets* continue to dominate their developed counterparts and after gaining nearly 7% last week, they find themselves only 0.2% below where they started the year.
Despite the recent momentum exhibited in riskier assets, the S&P 500 Index is still below the all-time high set last May 21 when the benchmark closed at 2130. The 200 trading days that have taken place since then represent the longest period the market has gone without setting a new high since this current bull market began In March of 2009. In fact, during this secular bull market, the average length of a market cycle (i.e. Peak-to-Trough-to-New Peak) has been 91 trading days. These 91 days have on average consisted of 38 days of a downturn and 53 days of an upturn. If the February 11 closing price of 1829 holds as the bottom, this downturn will have lasted 185 days or nearly 5 times as long as the average since 2009.
It should be noted that while the market has not yet broken the 2130 level set last May, it came very close on November 3, 2015 when the S&P 500 Index closed at 2109, less than 1% short of this level. If we consider this as a “peak”, the May 2015 to November 2015 market cycle lasted 117 days, very much in line with past cycles. Continuing with this thinking would mean the peak-to-trough decline of 14% from November 3, 2015 to February 11, 2016 consisted of 68 trading days. The recovery that appears to be forming would then be only 16 days old with gains in the S&P 500 Index of 9.3%.
It will of course take time to see if this recent recovery has enough strength and stamina to surpass the 2130 level set last May, but recent momentum appears to be in favor of higher prices. Whether this momentum is being fueled by short term systematic trading strategies is a consideration that must be made but we at Hennion & Walsh believe economic and capital market conditions are supportive of additional incremental gains, at least through the end of this year.
Based on the varying size and duration of the market cycles we have witnessed since 2009, investors trying to time the market and/or those currently holding large cash positions are likely following a misguided strategy. To review your investing strategy or have a complementary portfolio diagnostic completed, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
*Small Cap U.S. stocks are represented by the Russell 2000 Index. Emerging Market stocks are represented by the MSCI Emerging Market Index. You cannot invest directly in an index.
Important Information and Disclaimers
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.