The S&P 500 was higher Monday, Tuesday, and Wednesday last week on optimism over the government opening back up. Then doubt about a December rate cut shifted the mood and we saw a massive drop on Thursday, which then bled into a big gap down on Friday morning. But by the end of the day, we saw a second consecutive Friday where stocks were down significantly early but rallied to finish virtually flat.
We’ve been on record that some choppy action in the first half of November was possible, and we are clearly seeing that, but we remain optimistic the bulls may take over the reins before the month is over.
Long Time Near Highs, Yet a Lot of Worry
The S&P 500 has now closed within 3% of an all-time high for more than five months in a row, but if you only read the headlines, you’d never realize it. This is one of the longest such streaks ever, yet the amount of skepticism and fear is quite high.
Just this week, The Economist had a cover talking about coming trouble, the American Association of Individual Investors (AAII) had nearly 50% bears, and the CNN Fear & Greed Index was reading “extreme fear.” This simply isn’t what you’d expect to see with stocks near all-time highs.
Good, It Is Still 1929
How hated is this rally? Here’s an op-ed in the New York Times suggesting a 1929 crash may be ahead. If we are seeing things like this in newspapers, we’ll take the other side.
Surveys Indicate Consumers Are Bracing for Pure Calamity
The Michigan Consumer Confidence survey suggests that consumers are now more worried about things than they were 25 years ago during the tech bubble collapse, or in the depths of the Great Financial Crisis, or during a once-in-a-century pandemic. Things aren’t nearly that bad, and once again, this shows extreme negative sentiment that is likely a reason for this rally to continue. In fact, the recent reading was the second lowest ever. The lowest ever? June 2022, the exact month that most stocks bottomed and started to rally from that bear market two years ago.
Another Clue This Rally Is Hated
The American Association of Individual Investors (AAII) sentiment poll continues to show historic levels of worry. In fact, only three years in history saw the bears outnumber the bulls by 10% or more on average for the full year: 1990, 2008, and 2022. All were down years for investors (with 2008 and 2022 two of the worst years ever) and all three saw bear markets. Well, we are about to add 2025 to that list, as we are seeing a rare level of skepticism, yet stocks are up nicely. Once again, this shows this rally is indeed hated and, from a contrarian point of view, that could be quite bullish.
Don’t Give Up on November Yet
“You don’t need a weatherman to know which way the wind blows.” — Bob Dylan, “Subterranean Homesick Blues”
Despite all the negativity we hear (in fact, partly because of it) our view hasn’t changed. We believe we are still in a major bull market and it isn’t over yet. That’s why we like this Bob Dylan quote. It’s a tuneful reminder not to get sucked into all the fear-mongering out there and to stay objective. We are in a bull market and we believe it has legs. We’ve been saying this same thing for years, and the good news is we believe the facts still support that view.
Yes, it has been a rough start to November, but after a six-month win streak for the S&P 500, some consolidation is perfectly normal before another surge higher. And we have found that when the S&P 500 was up more than 10% year to date heading into November (like this year was), the month of November has been higher 13 out of the past 14 years and the final two months (November and December) have been higher the past 16 times in a row. Don’t give up on November just yet.
Don’t Fight the Global Economy
Last week, we shared some classic market wisdom with a deeper discussion of why it all might apply in the current environment.
Those were:
- Don’t fight loose fiscal policy (and there may be more to come in an election year).
- Don’t fight the White House (and its desire to boost markets).
- Don’t fight the Fed (and its prioritizing boosting the labor market).
This week, we look at one of the others we mentioned:
- Don’t fight a potential global recovery (and companies’ ability to benefit from that).
No Sign of Deterioration Typical of Recessions
Let’s start with the US. The shutdown is now over, and one way it impacted anyone who follows the economy is we barely received any official economic data over the more than seven weeks of the shutdown. That includes payrolls, consumer spending, income, and production data. A lot of these are inputs that go into our own Carson Leading Economic Index (LEI) for the US, but fortunately, it makes up only about half the inputs. The remaining inputs are private market data, so we’re still able to get a reasonable picture of how the economy is doing (one advantage of having our own index).
Our proprietary US LEI has been on bit of a rebound since May, and it currently says the economy is growing close to trend. Note that even during the worst of the downturn (April-May), levels were well above what we would normally associate with a recession, or even levels we’ve historically seen in advance of a recession (like in 2000 or 2007). As you can see below, the LEI’s current level is actually in pretty solid territory, and that’s good news. Current levels are even better than what we saw in mid-2022, when recession risks were elevated but the economy never plunged into an actual recession. This was a big reason we didn’t call for a recession anytime between 2022 and 2024. This was in sharp contrast to all the recession calls you saw in 2022 and 2023, including signals from other popular leading economic indicators. You can also see that the LEI deteriorated sharply back in 2018, amid the trade war and Fed tightening, but the economy avoided a recession back then, too.
Earnings Painting a Positive Economic Picture
The lack of economic data has put more focus on the macro implications of corporate earnings. And things look quite good on that front. S&P 500 earnings are expected to grow more than 10% in Q3 (the fourth straight quarter of double-digit earnings growth). Revenue growth is estimated around 8%, which is the highest quarterly growth rate in three years (since Q3 2022). A big part of this is the rebound in international revenue, and that matters because about 40% of S&P 500 revenue comes from abroad. That also corroborates a broader story that we’re seeing in our LEIs for the rest of the world.
Developed markets (ex US) are now growing quite a bit above trend. And it’s not being driven by any one country—countries across Europe (especially Germany, Spain, Italy, and the Netherlands) are seeing activity running above trend, as well as Japan and Australia globally. Of course, keep in mind that trend growth in these countries is lower than what it has been in the US over the last 25 years. Still, there’s a global fiscal reflation story here, plus the tailwind of central banks across the developed world cutting rates.
Activity in emerging markets is also rebounding after running below trend for over three years. This is mostly on the back of activity recovering in China, Taiwan, and South Korea. This is likely a function of the worst of the trade chaos now behind us, with China in particular getting a big reprieve. We’re likely to see more fiscal spending next year in countries like Germany and China, which will be positive for those countries and the regions.
The rebound in global economic activity is a tailwind for US companies, but also the US economy. It’s hard to picture a significant slowdown (let alone a recession) in the US when growth in the rest of the world is rebounding. Contrary to the narrative of de-globalization, globalization is alive and well, especially for US companies, which are benefitting from it now just as they have over the last 25 years.
This is all evidence that this week’s piece of market wisdom is in play right now: “Don’t fight a potential global recovery and companies’ ability to benefit from that.” The US is often the growth engine of global developed economies, but we may be entering a period where global economies, including the US, may all be pulling together. It’s not at all the case that the US outlook is negative, just that a more coordinated global recovery means it has to carry less weight. That might be especially beneficial for corporate America, whose exposure to the rest of the globe is much higher than the US economy in general. When the global economy rebounds, market participants should gain confidence in the earnings outlook for US companies, and that’s what we think we’re seeing now.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly traded companies from most sectors in the global economy, the major exception being financial services.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
Compliance Case #8610454.1–1125-C
