Uncertainty Now; Opportunity Later: 2015 Economic & Stock Market Outlook, Mid-Year Update
The weight of the evidence has slipped to neutral at mid-year as the bullish influences from Fed Policy and Seasonal Patterns/Trends present at the beginning of 2015 have waned. Sentiment has made a round trip from neutral to bearish and now back to neutral, while breadth rose from neutral to bullish and is now back to neutral. This is not inconsistent with a stock market (using the S&P 500 as a proxy) that has struggled to sustain gains. In such an environment, investors should be selective in looking for opportunities, be cautious of crowded trades, watch relative trends, and wait for confirmation.
The message at mid-year is caution now, but opportunity later. To be sure, we do not know how the second half will unfold, but it is not difficult to envision a more constructive environment as we move through the second half. If and when the Fed finally raises rates, conviction in a gradual tightening process could raise Fed policy back to bullish, and better seasonal patterns (and perhaps improved momentum) could be in store in the fourth quarter. On the other hand, a quick return of investor optimism and/or further breadth deterioration could add downside pressure in the near term.
Chart 1: Uncertainty has risen as the S&P 500 has settled into a broad trading range
Chart 2: A correction is overdue, but that alone does not mean one is imminent
Chart 3: Should the focus really be on something [Greece] that is down 80% over the past five years?
Chart 4: Weight of the evidence has cooled to neutral on downgrades of Fed Policy & Seasonals
Chart 5: The Fed continues to expect to raise rates this year, but the path is lower for longer
Chart 6: Too much can be made of the actual lift-off date, as stocks tend to weather it well
Chart 7: The overall policy back backdrop has become more supportive of economic growth
Chart 8: Based on key drivers, bond yields are about where they should be
Chart 9: Economic performance has not matched expectations, but then it rarely does
Chart 10: Leading indicators suggest the economy remains on solid footing
Chart 11: Business activity has moderated but not warning of weakness for the economy . . .
Chart 12: . . . or for stocks
Chart 13: Improvement in wage growth speaks to a broadening economic recovery
Chart 14: Rising wages could turn focus back to improving productivity
Chart 15: Stock market valuations are stretched
Chart 16: The reach for yield has left that market segment significantly over-valued
Chart 17: When sector adjustments are made, Europe’s valuation advantage disappears
Chart 18: Better earnings growth could relieve some valuation pressures
Chart 19: Heavy household exposure to stocks tends to depress returns going forward
Chart 20: News of less optimism is welcome, but still little evidence of increased liquidity
Chart 21: No fear or volatility in stocks as VIX has moved steadily lower in 2015
Chart 22: Investor optimism has retreated from recent highs, but is hardly historically low
Chart 23: Expected seasonal tailwind for 2015 has not materialized
Chart 24: Industry group trend has faltered after early-year improvement
Chart 25: Breadth trends for the S&P 500 have cooled as the average stock has struggled
Chart 26: NASDAQ breadth trends are improving and on the cusp of breaking out
Chart 27: The dispersion of sector-level returns suggests stocks are out of gear
Chart 28: Small-cap leadership emerged in late-2014 and has persisted in 2015
Chart 29: Seasonal patterns could be a significant headwind for small-caps in the second half
Chart 30: After an early-year hiatus, funds are flowing back to the U.S.
Chart 31: U.S. leadership is re-emerging, with price and momentum turning higher
Appendix – Important Disclosures
Disclaimers
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