Stocks Return to Record Highs
So much for the panic... Stocks return to record highs... Why we remain cautiously bullish... Is tax reform back on the table?... Earnings grow by the most in six years... This measure says the market is still 'healthy'... 'You know what a top feels like'...
Well, that didn't take long...
It took the market just five trading days to completely reverse after this month's "mini-panic." And last Thursday – just six days after the largest single-day decline in months – all three major U.S. stock market indexes jumped to new all-time highs.
The latest records followed "hawkish" news from the Federal Reserve...
According to the minutes from its May policy meeting, most members "judged that if economic information came in about in line with their expectations, it would soon be appropriate for the committee to take another step in removing some policy accommodation." In other words, barring any unexpected news, the Fed is likely to raise rates again when it meets in June.
Following the financial crisis, rate increases were generally seen as bearish for stocks... It was akin to the Fed "taking away the punch bowl." But recently, the narrative has changed... Now, rate hikes are largely seen as bullish – as confirmation of a strengthening economy.
Regular readers know we remain cautiously bullish today...
Sooner or later, mounting credit problems and extreme valuations will "matter" to investors... But there are plenty of other reasons to believe stocks could go much higher before they do.
For example, last week several Republican lawmakers indicated Congress is now putting health care reform on the "back burner" to focus on tax reform instead.
As we've discussed, tax reform was one of three big Trump policy proposals the markets cheered last fall. Any sign of progress on this front could push the market higher.
The financial media is also touting the strongest U.S. earnings and revenue growth in nearly six years...
As the Wall Street Journal reported on Thursday...
With nearly all companies in the S&P 500 having reported results, aggregate earnings for the first quarter are on track to grow 13.6% from the year-earlier period, according to FactSet, the highest growth since the third quarter of 2011. The gains were broad, ranging from heavy-equipment maker Caterpillar to social network Facebook to regional bank U.S. Bancorp...
Sales are picking up after many companies had turned to reducing costs and delaying investments in infrastructure to boost profits through the recovery from the financial crisis. Revenues are expected to grow by 7.7% from the year-earlier period, according to FactSet, the highest rate since the fourth quarter of 2011.
It's also worth noting that earnings are rising despite a slowdown in stock buybacks. According to data from S&P Dow Jones Indices, buybacks decreased 1.4% from the fourth quarter of 2016, and nearly 20% year over year.
Why is this important? Because stock buybacks reduce the number of shares outstanding, many companies have been using them to "grow" earnings per share in lieu of actual earnings growth.
Of course, even with this impressive first-quarter growth, the market remains historically expensive. Both earnings and revenue would need to grow at this pace for several quarters at least to justify today's prices.
We continue to believe this is unlikely, barring significant changes in Washington, D.C. But in the short term, this news could be a bullish tailwind for stocks.
Perhaps the biggest reason to remain bullish today is simply because most investors aren't...
The old Wall Street adage says "bull markets climb a wall of worry." And that has certainly been the case for the past eight years. The broad market has risen nearly 300% since 2009... yet how many of your family members, friends, and neighbors have been bullish along the way?
As longtime readers know, no one has been more bullish – or more correct – about stocks over the past eight years than our colleague Steve Sjuggerud. And Steve has predicted again and again that the long rally won't end until individual investors finally turn bullish on stocks again. As he explained in an edition of his free DailyWealth e-letter last fall...
YOU KNOW WHAT A TOP FEELS LIKE. You went through one in the real estate boom in 2006-2008...
Everyone thought they had their own spin on it... They thought they had their own unique way of making money that was somehow special to them. They didn't realize that, whether they were "flipping" houses or "developing" houses, all the strategies were essentially the same – in that they all relied on higher and higher asset prices to succeed. THAT is what a top looks like. THAT is what a top feels like.
You might say, "Steve, but that was house prices. This is stock prices." If that's your argument, you're fooling yourself... Investors had the exact same (delusional!) feelings about tech stocks in 1999 that they had about house prices in 2006-2008.
Look, you KNOW what a top feels like – so let me ask you, does this feel like a top in stock prices? Is everyone optimistic about stock prices? Is everyone "in"? Is everyone talking about their "can't lose" stock strategies at cocktail parties?
If you can't answer yes, then this is not a top. This is not a moment like the one we had with tech stocks in 1999, or real estate in 2006-2008.
But that's not all...
In this morning's edition of DailyWealth, Steve shared another big reason he believes the rally will continue. In short, an important measure of market "health" remains strong today. As he explained...
In a strong bull market, more stocks should be going up than going down – right? Sounds basic.
Well, what if the overall market was going up... but more stocks were falling each day than rising? That's what was happening at the end of [the dot-com boom in] 1999.
You can see this in the chart below. The blue "advance/decline" line is a simple indicator... You take the number of stocks that went up in a day, and you subtract the number that went down. If more went up, this line goes up. If more went down, this line goes down. Take a look...
As Steve noted, in a typical bull market, the market and the advance/decline line rise together...
It's often not until the late "innings" of a rally when the two begin to diverge. This can be an early warning that a market is unhealthy. But this simply isn't happening today. More from Steve...
Today's advance/decline line looks nothing like the late 1990s. Take a look...
Today's market is still "healthy." The number of advancing stocks is still higher than the number of declining stocks each day. Based on this indicator, the market is not looking "weak" yet.
This isn't the only indicator I look at, of course. It's just one of many, showing a similar conclusion. This one isn't foolproof either – it didn't give any advance warning at all in some market downturns.
Again, it's just one indicator... one piece of evidence among many that tells me we still have more upside ahead.
Yes, this is the second-longest bull market in history. No, it doesn't feel like a top – yet.
Again, Steve and Porter shared their latest thoughts on the market – including the one thing they agree every investor should do today – in last week's live educational webinar: "The Day the Bull Market Will End."
If you missed it, you can still watch a full replay of the event right here. But don't delay, this presentation won't be online much longer.
New 52-week highs (as of 5/29/17): none (markets were closed for Memorial Day).
In today's mailbag, a comment on our "repetitive, redundant, or downright annoying" advice... more on the Porter versus Steve "controversy"... and a wonderful Memorial Day note from a Stansberry Alliance member. Send your questions, comments, and concerns to feedback@stansberryresearch.com. As always, we can't respond to every e-mail, but we read them all.
"Porter, your constant articles on correct position sizing might seem repetitive, redundant, or even downright annoying to some readers. As an avid longtime investor however, I wanted to encourage you to continue relentlessly hammering the importance of this concept.
"I have made virtually every investing mistake an investor could make over the years, but it is clear to me in retrospect that the ONE biggest mistake was incorrect position sizing (the second was not adhering to my trailing stops, which is your other main theme). My previous concept of risk allocation was to simply place a similar amount of capital in each position. You can guess the results!
"I'm still in the process of completing the move to correct sizing (capital gains or losses prevent me from adjusting sizing more quickly), however I can tell you it has already made a world of difference in results, not to mention portfolio stability, and most importantly peace of mind. Thank you and keep up the great work!" – Paid-up subscriber Steven B.
Brill comment: Thanks for the note, Steven. We're always thrilled to hear when a subscriber finally gets it. And at the risk of being "annoying," we'll also remind the rest of our readers that there has never been a better time to try risk-adjusted position sizing for yourself. Until tomorrow night at midnight, Dr. Richard Smith will allow you to "test drive" his full TradeStops service – absolutely risk-free – for a full 60 days. If you aren't 100% satisfied, he'll refund every penny. You literally have nothing to lose. Click here to try TradeStops now.
"Wow, people just don't seem to get that we are all responsible for our own decisions. If you don't learn that quickly, I'd say any success in investing is pure luck!
"That said, I love that through Stansberry I get a range of opinion and recommendation, and not everyone is just spouting the same mantra! It's interesting though when you dig a little deeper and think about their advice: sure, Porter is more bearish, while Doc and Steve are more bullish, BUT, the big BUT, everyone I've read from Stansberry says 'position sizing, core strong companies are the majority of your positions, STOPS, you must know when to get out'... Even Doc and Steve who are saying 'you have to be long, biggest gains to come', are also saying 'be disciplined, position sizing, and use those stops... WE DON'T KNOW WHEN IT WILL END... but for now ride it along.' Basically, now is a time of plenty (has been for quite a few years)... but the famine will come and they all agree when it does it's likely going to be a doozy.
"I think The Total Portfolio shows how they can all agree and all disagree... it's got strong core investments, some speculation to ride the wave, some shorts for when the famine finally comes. I think it will turn out great, in fact I'm ecstatic that the shorts are doing so well in a strong uptrend. I'm still learning, but appreciate the diversity of thought!" – Paid-up subscriber Ken C.
"I just wanted to send out a note to once again thank you and the Stansberry family for all you have done for us. Becoming an Alliance member definitely ranks up at the top of things I have actually done right in my life. Today, we surpassed the money made to cover the cost of the lifetime membership. Pretty cool since we only joined a few short months ago! The Total Portfolio as well as some other recommendations from the two doctors (Steve and David) have put us up considerably this year already. We have the majority of our net worth tied up into our business and real estate, otherwise, the 'actual returns' would be much more impressive.
"I am a former submarine sailor serving on the boomers and fast attacks for 8 years before returning to civilian life some 31 years ago. I became accustomed to being around the 'cream of the crop' as most did not qualify or could not make the cut to be a submariner. Being a nuke, the numbers were even more selective if you succeeded in reaching that status. Admiral Rickover was very select in who he allowed to run his nuclear vessels. I was honored to be included in that group of officers and men.
"When I returned to civilian life, I found the company was not as selective when I became employed by the nuclear utilities... but it was selective nonetheless. I worked with many talented men and women of which I still remain friends with even though I retired from that life some 16 years ago. Top notch people for the most part! I am an Enron survivor, as well, but that is another story for a different time.
"My wife and I have run our quaint small business for the past 16 years and have found that the character of most business owners is not even close to what I had become accustomed to. Too many are corrupt and deceiving in what they offer in products and services. It is both disheartening and disgusting, in my view. This includes investment businesses that we had dealings with over the past 30 years. That is not to say all small business owners are cut of this cloth.
"The family at Stansberry Research is a welcomed part of our lives that I do not take for granted. You are truthful and to the point. I applaud Porter for giving people an opportunity to either succeed in their investment endeavors... or to hang themselves for not following recommendations. As a lifetime TradeStops subscriber, I am grateful for these tools that otherwise would not have been on my submariner radar screen. I am thankful for all that you offer me and I know that I cannot possibly take advantage of every idea, conference or webinar that comes my way. Yet, I don't need to. Stansberry Research has my back with the early emails regarding actions to take sooner than later.
"So, this weekend as I remember my fallen brothers, sisters, mothers and fathers I will also be remembering how blessed I am to be a part of the Stansberry Family... knowing that my financial future is indeed secure and looking better each and every day. I no longer worry about my investments but rather look forward to seeing the bottom line whenever I log into my accounts. I predict that future generations of my family will now be so much better off... thanks to the existence of Stansberry Research! Thank you! Have a GREAT Memorial Day weekend! God Bless!" – Paid-up Stansberry Alliance member Al Bowman
Regards,
Justin Brill
Baltimore, Maryland
May 30, 2017