April 2, 2019

We’ve just enjoyed the best first quarter in the 21st century – the biggest opening-quarter stock market increase since 1998. The three most-watched indexes each gained over 11% in the quarter just ended, but despite any recent “overbought” condition, the market kept rising, with smaller growth each month.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Until recently, April has been historically the best month of the year for the stock market, but in the last few years December and November have surpassed April. The following chart displays average gains per month as of November 30, 2018 – right before December’s decline: This just goes to show that historical precedents are no way to invest in the stock market. December was the BEST month, but please recall what happened LAST December – a bloodbath we are all doing our best to wipe from our memory banks.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Since 1950, April has been up an average +1.45% in the S&P 500, just behind December and November. April has also risen the last six years in a row and 12 of the last 13 years, rising an average 2.77% in the 13 Aprils from 2006 to 2018. This year, however, we might not be able to keep this winning streak going if first-quarter earnings announcements start coming in negative in their year-over-year comparisons.

FactSet data currently shows analyst expectations of S&P 1Q earnings falling 3.9%, and the Atlanta Fed’s GDPNow forecasts just 1.7% GDP growth, so with the economy and earnings slowing down in the first quarter, it’s hard to envision a full year of the lofty optimism that drove the S&P’s 13% first-quarter gain.

The Latest Premature Tizzy-Fit – An Inverted Yield Curve

By one narrow measure, the “yield curve” inverted by low single-digit basis points (0.02% to 0.09%) a week ago, and this sent the market into a tizzy the previous Friday, March 22. But the yield curve is only one of 10 “leading indicators,” so-called because they tend to lead the economy (i.e., predict the future).

The yield comparison used in the Leading Economic Indicators (LEI) is the spread between the 10-year Treasury rate – set by the market – and the fed funds rate, set by the Federal Reserve, so it is an artificial construct based on the whims of the Fed Governors and their changing interest-rate policy decisions.

A more rational yield curve measurement would be the 10-year over the 2-year Treasury rates. By that measure, the yield curve has remained positive by at least 13 basis points in March, closing at +15 bps.

What’s more, we need to look at ALL 10 of the leading indicators to see where the economy is going, and not get obsessed with just one of 10 indicators. The overall LEI rose 0.2% during February, and it has been rising solidly for 10 years (see chart below) although it has been flat for most of the last five months.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Both the LEI and the Index of Coincident Economic Indicators (CEI, blue line above) are in record-high territory. The less volatile CEI has risen 2.5% over the 12 months (through February 28). The CEI tracks well with GDP, so this suggests that real GDP is growing at a reasonably healthy 2.5% annual rate.

In the past, I have written about not overreacting to slight or temporary yield-curve inversions. First, there is the long lead-time. According to economist Ed Yardeni, “Prior to the last seven recessions, the yield curve inverted with a lead time of 55 weeks on average, with a high of 77 weeks and a low of 40 weeks. Along the way, it gave a few false, though short-lived, signals during the 1980s and 1990s.”

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Notice the several “false alarms” in the late 1980s and 1990s. Even if accurate, once the yield curve stays inverted for a few weeks, that still means we have about a year to plan for the next possible recession!

We must also watch the Fed’s hot-and-cold reactions to the economic data. Since a yield inversion depends on the Fed’s actions, a rate cut would solve an “inverted” yield curve situation overnight. Right now, the Fed says they will institute no more increases this year, but they never promised not to cut.

There are several more technical reasons I could cite for not losing sleep over a short or temporary yield curve inversion, but suffice it to say: Wall Street must always climb its “wall of worry,” justified or not.

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*


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