Stock market tranquillity is breaking all records

Stocktake: US stocks set for bumper earnings season as S&P 500 surge continues

It’s official – this is the easiest stock market in history.

Investing is meant to be a nerve-busting business, with stocks typically enduring unpleasant descents, even in bull markets, but the current ongoing rally is different. It’s now been more than 400 trading days since the S&P 500 last experienced a 5 per cent reversal, surpassing the previous record (394 days) set in 1996.

Indeed, it has been more than 14 months since the index experienced a 3 per cent pullback – another record-breaking streak. There is a danger that markets get lulled into a false sense of security. The latest Merrill Lynch fund manager survey, for example, shows fund managers believe bets on falling volatility represent the most crowded trade in global markets. If conditions change and volatility increases, such trades might need to be unwound quickly, with forced selling into weakness exacerbating initial volatility and potentially triggering a negative feedback loop. Still, history offers some comfort to investors. The pullback that ended the 1996 streak was an inconsequential one; the bull market raged on for another four years. Historical data shows that typically, trading tends to get volatile and choppy well before before the end of market uptrends. In other words, the current streak must end eventually, but when it does, the move lower is unlikely to be decisive. The bulls remain in control.

Bumper earnings season in store for US stocks

The S&P 500 has beaten earnings expectations for 34 consecutive quarters, according to LPL Research data, and there’s little reason to think the current quarterly earnings season won’t make it 35. Such figures are testament to how earnings season is really cheating season, with companies invariably beating artificially lowered profits estimates.


Still, the early stats have been impressive. So far, 79 per cent of companies have beaten earnings estimates and 87 per cent have topped revenue estimates, both of which are well above historical norms. LPL expects US earnings to increase by 14 to 16 per cent, for a number of reasons. Citigroup’s Economic Surprise Index – a measure of economic data relative to expectations – is near record highs, and companies typically beat estimates in such environments.

Marked US dollar weakness in the fourth quarter of 2017 "could present a tailwind" for US multinationals, propping up their non-US earnings. The ratio of negative to positive pre-announcements "is as favourable as it has been throughout the entire economic expansion". Additionally, analysts typically reduce estimates during the quarter being reported, but estimates remained stable in the most recent quarter. Last week, Netflix blew past estimates, enjoying a share price pop that helped it become the latest company to enjoy a market capitalisation in excess of $100 billion (€81 billion). It's still early days in the current earnings season, but there's little to suggest corporate fundamentals will disappoint any time soon.

January’s big gains augur well for 2018

Stocks have enjoyed a “super-frothy” ascent in January, as Merrill Lynch put it recently, with the S&P 500’s 6 per cent gain representing the index’s best start to a year since 1987.

Maintaining that pace is impossible, but the bright start to 2018 does augur well for the rest of the year. Technical strategist Ryan Detrick found 12 previous years where stocks rose at least 5 per cent in January. Stocks "finished in the green" on every single occasion, averaging gains of 25 per cent. The final 11 months closed higher in 11 out of 12 cases, 1987 proving the sole exception.

What's especially interesting about the recent advance is that big monthly gains typically occur after major lows or down months. It is, notes Fat Pitch blogger Urban Carmel, "pretty rare" to see big gains during an ongoing uptrend. Iconic money manager Jeremy Grantham recently predicted stocks may be about to enjoy a late-cycle "melt-up" – a process that may already be under way, judging by January's price acceleration.

A bleak future for financial advisers?

The continued pressure on fees means a lot of financial advisers will lose their jobs in coming years, warned new Vanguard chief executive Tim Buckley recently.

It’s hard to disagree. Just as Vanguard’s incredibly successful low-cost passive investing model has squeezed the active fund industry, advisers are coming under pressure from robo-investing firms offering similar services for a fraction of the price.

The robots can't do everything, of course. "Behavioural coaching is difficult to code," said Buckley, who recommends advisers focus on "uniquely human tasks" that help lessen client anxiety in times of panic. Some will resist this advice, but the long-term, low-cost trend is unmistakable, as captured by author and financial columnist Jason Zweig last week. "1980: 'Index funds are un-American'. 1990: 'No-load funds are no-help funds'. 1995: 'You get what you pay for'. 2000: 'We pick the best managers'. 2015: 'No robo-adviser can replace what we do'. 2018: 'Of course the CEO of Vanguard would say that'. 2020: 'Hi. I'm your Lyft driver'."