It’s been almost a year since the U.S. stock market hit its all-time high, and the market has made little progress since then, basically standing in place as if stopped at a malfunctioning red traffic light.
Since its peak of 2130.82 on May 21, 2015, the Standard Poor’s 500 stock index is down about 4% after recently flirting with a fresh high. But it has endured wild swings along the way that have added up to a sideways market. Along the bumpy road to nowhere the SP 500 has bounced back from its first correction, or 10% drop, since 2011, overcome its worst start to a year ever, and survived the Federal Reserve’s first interest rate hike in nearly a decade.
Barring a big rally this coming week, the SP 500 will join 20 other periods since 1930 when stocks have gone 365 days without making a new high, according to Bespoke Investment Group.
The roadblocks holding stocks back are well-known. A profits recession began six weeks after the market peak. SP 500 companies have seen their earnings contract three straight quarters. The SP 500 has also been held back by swelling prices relative to earnings, with its P-E ratio for the coming four quarters nearing 17 times earnings, above the longer-term average P-E of roughly 15.
Add in crashing oil prices, fears of China’s once-booming economy imploding, a sharp rise in the value of the dollar and uncertainty over the timing of the Federal Reserve’s next interest rate hike and the upcoming presidential election, and what you get is a stalled-out market.
“The U.S. stock market has battled dual headwinds related to earnings — the energy price plunge and strong dollar — while effectively pedaling up an economic hill due to a slowing Chinese economy and anemic U.S. economic growth,” says Erik Davidson, chief investment officer at Wells Fargo Private Bank. That is “not a conducive environment for a stock market advancing to new highs.”
Following the prior 20 times the SP 500 has gone at least a year without making a new high, it has posted flat median returns six months after the new-high drought hit 365 days. But it was up roughly 9% a year later, Bespoke’s data show.
The U.S. economy was in recession 11 of the 20 times the SP 500 stalled out for more than a year. The good news? The U.S. economy is in slow-growth mode and not in recession, says Jonathan Golub, chief U.S. market strategist at RBC Capital Markets. “We’re now looking at a rebound in profits later in the year, and that I think is a good set-up,” he says.
So what will nudge the stock market out of its funk and propel it to a new record?
* Better earnings. “The market is at the high end of fair value or the low end of overvalued,” says Bill Hornbarger, chiev investment strategist at Moneta Group. “The most likely impetus to another push higher for stocks is better earnings.”
* Dissipating headwinds. Says Mark Luschini, chief investment strategist at Janney: “Energy earnings will get support from $40-plus oil. U.S. multinationals will start to get (sales and earnings) relief from dollar headwinds starting in the second quarter. And the rest of the world has to improve to lift investor confidence.”
* “Big Three” worries must ease. The economies in the U.S., Europe and China (which account for nearly two-thirds of world GDP) must start growing again, says Joe Quinlan, chief market strategist at U.S. Trust.
“As they go, so goes the world economy,” Quinlan says. “To break to the upside we need the Big Three to get in sync, or put in place fiscal policies that help promote growth and dampen investor fears of a global recesson.”
But the odds of that happening, he says, are “slim.”
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