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S&P 500: Not All, All-time Highs are Created Equal
07/09/2019 10:55 am EST
Equity markets often hit all-time highs as the economic is shifting to slower growth right before major downturns, warns Landon Whaley.
Everywhere you look these days, financial markets are printing all-time highs. No development exposes our humanness and brings out the FOMO (fear of missing out) more than a new all-time high (ATH)! But investors should take heed; not all all-time highs are created equal.
Mixed Signals in the U.S.
Despite a Fall or Winter Fundamental Gravity environment for three consecutive quarters (and at least two more growth slowing quarters coming our way), the U.S. has seen a stampede of growthy markets making all-time highs in recent weeks. Everyone’s favorite benchmark, the S&P 500, has led the charge higher, followed by the Nasdaq, consumer discretionary stocks, technology, healthcare, investment grade corporate bonds, and junk bonds.
Growth markets are hitting all-time highs, and at the same time, we’re seeing new all-time highs in asset classes that generally thrive in Fall and Winter FGs: short-term Treasuries, 7-10 Year Treasuries, long-dated Treasuries, REITs, utilities, and consumer staples.
After the best June since the 1950s, investors are in quite a quandary. U.S. markets that should be getting the woodshed treatment (given the prevailing FG) are breaking to new all-time highs. At the same time, markets that only hit all-time highs within growth slowing regimes, are also busting a move to new highs.
Are markets sending us mixed signals?
S&P History Lesson
The 30-history of S&P 500 future all-time highs tells us they are a regular occurrence during growth slowing regimes, and it also tells us the most likely outcome once one of these “growth-slowing” all-time highs are achieved. Here are some examples:
- While U.S. growth was slowing in Q3 1990, the S&P 500 peaked at a brand new all-time high of 369.78 before dropping 20.3% over the ensuing six months.
- The S&P 500 peaked 10 years later at an all-time high of 1552.87 during a Fall FG in Q1 2000 before a crash of 50.5% over the following three years. Investors who bought that Q1 2000 all-time high had to wait eight years to breakeven as the S&P 500 finally took out the Q1 2000 high in Q4 2007.
- Speaking of that pre-Crisis 2007 all-time high, it occurred amid yet another Fall Fundamental Gravity. The S&P 500 climbed to 1576.09 before getting destroyed over the next six quarters and losing 57.7% in the process.
- During a growth slowing regime in Q2 2011, the S&P peaked at a lower, interim cycle high (not an all-time high) of 1370.58 and then proceeded to drop 21.6% before bottoming on Oct. 4, 2011.
- Following a three-year rally off that October 2011 floor, everyone’s favorite benchmark hit another all-time high while growth slowed during Q2 2015. The S&P 500 peaked at 2134.72 on May 20, 2015, and then corrected 15.2% before finding its footing six months later.
The pattern here is crystal clear. All-time highs over the last 30 years have occurred during growth slowing regimes here in the United States, which were followed by significant reversals in the months ahead.
Since April 29, the S&P 500 has minted a new all-time high on six occasions, the most recent being last Wednesday at 2995.84. Each of these all-time highs occurred against a backdrop of growth slowing, just like those we highlighted above. The U.S. and Global Fundamental Gravity, coupled with the coming earnings recession that few see coming, means the S&P 500 will drop at least 2671 points (10.7% from Friday’s close) before the year is out.
The Bottom Line
Not all ATHs are created equal. Chasing all-time highs in the S&P 500 and growth sectors like tech and consumer discretionary during Winter market environments carries significant risk. On the flipside, all-time highs in markets like utilities, REITs, and Treasuries confirm the growth slowing environment and beget higher prices for these assets in the months ahead.
Don’t be drawn in by the Fast Money folks frothing at the mouth over this latest string of highs or Cramer bulling it up with buzzers and sound effects, “Buy, Buy, Buy!” Keep your head about you (buying bullish U.S. Shift Work markets) while everyone else is losing theirs.
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