3 Reasons for Bulls to Charge On

3 Reasons for Bulls to Charge On

Stocks swung like a chandelier in a windstorm this week. The Dow Industrials shed more than 800 points in just two days, as investors reacted to poor economic data tempered with excitement that the Federal Reserve will be obligated to ride to the rescue with lower interest rates.

But Friday’s jobs report, which showed the unemployment rate at a 50-year-low, helped pare back some of the week’s big losses. The Dow, S&P 500 and Nasdaq all rose 0.8% in early trade.

Bulls and bears have been duking it out all year, leaving the market up just a little over 2% in the past 12 months.

Winners are typically among the most “defensive” stocks on the board.

The S&P 500’s total return over the past 12 months was 2.3%.

Consider the list of new one-year highs on Thursday. Topping the new list were:

  • PepsiCo (PEP)
  • Equity Residential (EQR)
  • AvalonBay Communities (AVB)
  • Digital Realty Trust (DLR)
  • Realty Income (O)
  • Lennar (LEN)
  • Apartment Investment and Management (AIV).

Real Estate Investment Trusts galore, which is as defensive as you can get.

Manufacturing data in the U.S. has weakened for the past several months, adding to fears that a slowdown overseas is starting to hit the domestic economy.

The services sector, meanwhile, has held up better. But on Thursday, the Institute for Supply Management said its nonmanufacturing index — which tracks the services industries — hit a three-year low, sparking fears a manufacturing slowdown had spread to other parts of the economy.

The weak services data prompted traders to boost bets on further easing by the Fed. Futures show traders are betting there’s a 53% chance of the central bank lowering its benchmark short-term interest rate two more times by the end of the year, according to the CME Group.

That’s up from 39% Wednesday and 19% a week ago.

The services sector had previously been considered a bright spot in the economy, overshadowing signs of weakness in the manufacturing space.

But cracks started to emerge last week after data showed consumer spending cooled in August.


Reason No. 1: Back to Back

Jason Goepfert of SentimenTrader.com noted Wednesday that the S&P 500 suffered back-to-back 1% drops in October, while still being above its 200-day average.

The other eight times that happened since 1950, the market index lost further ground over the next week each time. But, three months later, it was higher after seven of the eight instances, with very low risk after that first week.


Reason No. 2: Upside-down World

If manufacturing is contracting as dramatically as we witnessed in data reported this week, then stocks should brace for hell. But like most things in the markets, the opposite has tended to be true.

Bad economic data has given bears a sense of hope that finally things are coming together for them. The problem with a lot of economic data, though, is translating its markets. There is often a disconnect between them.

Goepfert reports that is particularly true with the manufacturing data: The S&P 500’s annualized return when it’s below 48 is +11.9%, but when the survey is above 58, that drops to only +2.7%.

So, the bad data is actually ideal for bulls, not bears!

Goepfert’s data shows that when the survey dropped this low and was at least 20% of its peak, it did not consistently bode ill for stocks.

The average forward return for the S&P 500 in the 11 instances was +1.6% in the next week, +4.5% in the next month, +5.8% over the next six months and +19.5% in the next year.

(That said, however, the most recent instance was Dec. 29, 2000, and the two-month return was -6.5% while the three-month return was -13.2%.)

Results were very similar when looking at just the nine instances when the ISM Manufacturing Index fell under 48 for the first time in a year after being at least 60 in the past year. The most recent was June 30, 1989, and the next month was +8.1% while the six-month return was +11.1%.

Goepfert’s conclusion: There is a sense of whistling past the graveyard for anyone assuming this can’t be anything but bad for stocks. But there is plenty of historical evidence working against that assumption.


Reason 3: U.S. Personal Income and Employment

Jack Ablin of Cresset Capital in Chicago published a fascinating study this week about personal income trends by state.

In short, the Bureau of Economic Analysis released the U.S. personal income data, which breaks down income by state and by industry.

U.S. personal income grew 4.9% over the last 12 months, which was incrementally higher than its five-year annualized rate of 4.6%, suggesting income acceleration. The job market remains strong, with an historically low unemployment rate.

Moreover, there are a greater number of job openings than there are unemployed Americans, highlighting how tight the labor market is.

There was some fear that, if September’s employment report fell, bears would burn the house down. But we don’t need to put out any fires just yet.

The report, released just this morning, shows unemployment actually went down last month to 3.5%. — a 50-year low. A more complete count shows that underemployment and discouraged workers also fell to 6.9%, the lowest in almost 20 years and just off the all-time low of 6.8%.

While there are some less-than-stellar metrics for September — growth was reported, but slow with wages only growing by 2.9%, the lowest this year — there are still plenty of reasons for bulls to charge on.

So, keep your head up and a weather eye out over the next six months. History says we may not be done with our bull run just yet.

Best wishes,

Jon D. Markman

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