A bear market is coming, but keep buying stocks for now. So says Bank of America Merrill Lynch (BAML), which is keeping a close eye on 19 bear market signals, such as rising rates, high valuations, increased volatility and outperformance of low-quality stocks, among others.
Fourteen of 19 signals have now been triggered, it says, suggesting we are in the later stages of a bull market that’s now over nine years old. Looking at the last seven market cycles, BAML found it took an average of 21 months for stocks to peak after reaching the current threshold.
Selling too early is decidedly costly, however – stocks gained an average of 30 per cent during those 21 months. Indeed, BAML’s Bull & Bear Indicator – a contrarian tool measuring risk appetite which correctly triggered a sell signal near January’s market peak – is now on the verge of giving a trading buy signal. The near-term outlook looks bright but the “longer-term reasons for caution on stocks are building”, says Merrill.
Another blockbuster earnings season?
US earnings season is under way and expectations are high for what should be another blockbuster quarter.
The Trump tax cuts meant analysts were busy raising estimates over the last two quarters. Nevertheless, companies were “easily able” to beat already heady expectations, notes Bespoke Investment. About 62 per cent of companies beat estimates in an average quarter, but that figure was easily surpassed during the last two earnings seasons. Tax cuts were not the only driver, with revenue beat rates higher than any quarter since late 2004, notes Bespoke. In fact, if one combines the earnings and revenues beat rates, the last two quarters were the best two-quarter period since late 2003/early 2004.
Sentiment data suggests a repeat performance is likely, says UBS. Examining 118,000 transcripts of post-earnings conference calls across nearly 7,000 US and European companies over the last seven years, it found that upbeat language used by executives tends to augur well for stocks. The momentum in executive confidence, coupled with the macro backdrop, suggests companies will again comfortably top analyst expectations, says UBS.
The only problem is investors have gotten used to great earnings. If companies aren’t able to “keep up the pace”, says Bespoke, “we think the market will struggle”.
US outperformance hits extreme levels
The trade war has officially begun but US stocks are doing just fine, last week hitting their highest level since February.
The year 2018 has hardly been a vintage one for the S&P 500, but it has eked out a 4 per cent gain, which is respectable enough. The same can't be said of non-US markets. In China, stocks have fallen into a bear market, recently hitting two-year lows; other Asian markets have endured similar selloffs; the Euro Stoxx 600 remains in the red for 2018, with Germany's export-oriented Dax index enduring an especially disappointing year.
Recent outperformance partly reflects a feeling that while the US will not win any trade war, it has less to lose than other markets. Of course, the outperformance didn't begin recently – US stocks have trounced their international counterparts over the last 10 years. The gap in relative performance "has now reached the same extreme degree that we've seen ahead of prior reversals in that trend over the last 50 years", notes Schwab strategists. High relative valuations and the late stage of the economic cycle also support a possible trend reversal, it says.
Timing such matters is tricky, and the US may well continue to outperform for some time. However, the US is likely to be at the bottom of the global table over the next decade, reckons Morningstar, which now estimates “you won’t have any real return from US equities over the next 10 years”.
Insider trading: a how-not-to guide
Some insider trading are highly sophisticated. Others . . . aren’t.
The US Securities and Exchange Commission (SEC) is suing former Heartland Payment Systems chief executive Robert Carr for tipping his romantic partner in advance of the company's $4.3 billion takeover.
The SEC alleges Katherine Hanratty emailed herself a to-do list that included "HPY" – Heartand's ticker symbol – and conducted internet searches on how to buy stock, deposited a $1 million cheque given to her by Carr in her bank account, "inquired of the bank manager as to how to open a brokerage account", and then used $900,000 to buy the stock. After, she allegedly emailed Carr, saying, "I have done exactly what you recommended I do with it and made you the beneficiary of the account."
Still, the case pales in comparison to former analyst John Afriyie, who was jailed last year after he made $1.5 million by using his mother's TD Ameritrade brokerage account to trade on inside information. Jurors heard tapes where Afriyie, pretending to be his mother and using a high-pitched voice, called Ameritrade to discuss the account – asking how his computer's IP address was being traced and whether trades from a phone were tracked.
