Stocktake: Bulls beginning to win market battle

2018 has been something of a tug of war between bulls and bears, but the recent pick-up in the US market suggests optimists are beginning to win the contest. The S&P 500 has climbed 6 per cent since early April and last week hit three-month highs. At the same time, it remains stuck in a trading range. Stocks remain well shy of their January highs and have only barely eked out gains in the first five months of the year. That, coupled with the increase in volatility, has given 2018 the "feel of disappointment", as Fat Pitch blogger Urban Carmel put it. Still, investors have some reason for cheer. Tech stocks continue to hit new highs, with the Nasdaq posting double-digit percentage gains in 2018. The Nasdaq usually leads the broader large-cap indices, says Carmel, suggesting the S&P 500 is poised to follow to new highs. Nor are tech stocks the only source of strength, with small-cap and micro-cap indices also hitting all-time highs last week. It's notable too that the Vix, or fear index, has settled down. Volatility spiked higher following recent political turmoil in Italy but it was short-lived; last week, the Vix fell below 12 for the first time since January, further evidence the forces that unnerved investors in early 2018 are continuing to fade.

Return of the all-or-nothing stock market
Stocks are once again rising and falling in unison, as all-or-nothing days return to the US stock market. All-or-nothing days, says Bespoke Investment, occur when at least 400 of the 500 S&P 500 stocks move in the same direction. Once upon a time, they were a rarity. Between 1990 and 2005, there were only two years where stocks registered 10 or more all-or-nothing days. In several years, none at all occurred. However, their frequency "exploded" between 2006 and 2016; double-digit readings occurred every single year and as many as 70 occurred in 2011. Why? The Federal Reserve's dominant role in financial markets played a role, says Bespoke, but the dominant factor is the growth of exchange-traded funds (ETFs). Embraced by investors as an easy way of gaining equity exposure while minimising company-specific risk, their popularity has created "an environment of a rising tide lifting all boats and vice versa". Things were different last year, when only three all-or-nothing days occurred. However, 2017 was an anomaly, a year of freakishly low volatility. Now, all-or-nothing days are "back in a big way", with the index on pace to register 29 for the year. ETFs have permanently changed the environment. A greater frequency of all-or-nothing days is the new normal in today's stock markets.

Trump: 500 days of market greatness?
The ever-modest Donald Trump last week boasted about "500 days of American greatness". How do his first 500 days in office compare to other presidents? Last year, Trump couldn't stop talking about how he was God's gift to investors, but tweets alluding to market movements have dried up in 2018 as markets corrected.

As it happens, Trump's first 500 days have been good for stocks, according to LPL Research data, although not remarkably so. The Dow – an outdated gauge of market health, but one Trump prefers to use – gained 25.2 per cent. Trump will be pleased to see that puts him just ahead of Barack Obama (24.9 per cent). However, his overall ranking (of the last 20 presidents, Trump ranks sixth) is good but not great. Of course, many factors influence market movements; the presidency is a minor one. Stocks gained 80 per cent in Franklin Roosevelt's first 500 days, but that's largely because they were emerging from the depression-era collapse.

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Another outperformer, George HW Bush, turned out to be a one-term president following the 1990-91 recession. Stocks initially soared during the administration of Warren Harding, widely considered one of the worst US presidents – a point Trump would do well to remember.

Markets consolidate 2017 gains
Nervous investors might feel the correction earlier this year and the sub-par performance of equities in 2018 is evidence all is still not well in stock markets. However, history suggests there's little reason to be unduly anxious about stocks' performance in 2018, according to LPL Research's Ryan Detrick. Excluding dividends, stocks gained 19 per cent last year, barely pausing for breath in the process. Since 1950, there have been 24 years where the S&P 500 gained at least 15 per cent, notes Detrick; on average stocks gained only 2 per cent through the end of May the following year, indicating this year's performance is perfectly normal.

Furthermore, when stocks have gained between 0 and 5 per cent in the first five months of the year, they tend to generate above-average returns over the remainder of the year. “Some type of consolidation early in the year after strong gains is normal”, says Detrick. The “feel of disappointment”, as Urban Carmel put it, is misplaced.