August 14, 2018

The S&P 500 came within 10 points (0.3%) of its January 26 high last week. If we happen to surpass that previous high of 2872.87 this week, we’ll be on safer ground than we were during January’s manic highs. As of last Friday, 458 of the S&P 500 firms have reported second-quarter earnings and they are up 24.6% over the same quarter last year, marking the third consecutive quarter of double-digit earnings gains.

According to economist Ed Yardeni, forward earnings of the S&P 500 have risen 16.8% since the start of 2018. S&P 500 forward earnings were estimated at $147.23 at the start of 2018, but since then, they have risen to $171.93 as of the week ending August 2. Last January 26, the S&P 500 had a forward P/E of 18.6. Currently, the index trades at a forward P/E of just 16.7, due to the phenomenal rise in earnings.

At first, January was a manic up-market; then a mid-winter collapse scared us to death. After the January 26 peak, the S&P 500 fell over 10% in just nine trading days. In the middle of that free fall, Janet Yellen retired as Federal Reserve Chair-lady on Groundhog Day. Jerome Powell took over the next Monday, on February 5. He was thrown into a trial of fire and acquitted himself quite well, taking on a voice of calm and confidence in a time of panic. His firm guidance of the Fed and his ability to talk more plainly than previous Fed heads – avoiding “Fedspeak” whenever possible – have moderated the market’s volatility.

In addition to rising earnings, the GDP has come in at 4.1%, matched by consumer spending at +4.0%, exceeded by real capital spending (at +7.3%), due partly to the more favorable corporate tax rates. The last time the U.S. economy grew by more than 3% in a full year was during George W. Bush’s first term in 2005, when growth came in at +3.3%. The best annual growth during Obama’s eight years was +2.9%.

In addition, consumer confidence for July came in at a healthier-than-expected 127.4 vs. expectations of 126. You can see confidence shooting sharply above its historical average of 94.5 after the 2016 elections:

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

Quantifying the Risks of Market Externalities

I was intrigued by a letter in Barron’s “Mailbag” this weekend, which states, in full:

“Trump is likely to face some charges from Robert Mueller’s investigation, and his take-no-prisoners approach to self-defense will trigger a Constitutional crisis. Anyone wanting to quantify that risk?”

– Paul Pirrotta on, August 13, 2018

OK, I’ll take that on, Paul. Over 150 years ago, we had our deepest Constitutional crisis in the Civil War. When it became evident the Union would prevail, the best stock market measures of the day rose 55.4% in 1862 and 38% in 1863. After the war, President Andrew Johnson faced impeachment in 1868 and was spared by one vote. The market rose 10.8% that year and it rose seven years in a row, from 1866 to 1872.

If you want to turn to a Trump vs. Mueller analogy, 20 years ago this week, August 17, 1998, President Bill Clinton delivered an earnest four-minute speech on national TV on l’affaire Lewinsky, exhibiting the strain of a day spent sparring with his special prosecutors. How did the market react? The Dow quickly rose 290 points on August 17 and 18, the day before and after the evening speech, rising to 8715, in the market’s last great fling (pardon the expression) before drooping to 7539 on August 31. However, the market’s fall was unrelated to the President. It had to do with hedge funds and the Russian Ruble crisis.

The actual Clinton impeachment drama ran from October 8, 1998, when the House voted to begin the impeachment proceedings against President Clinton, ending on February 12, 2009, when the Senate failed to reach the necessary guilty votes. During those four months, the S&P 500 rose by a stunning 28%.

Reaching back 100 years, the world was mired in a seemingly endless “Great War” (not yet called World War I). The War to End all Wars seemed like the War That Never Ends, as men in foxholes advanced and then retreated a few hundred yards amidst millions of casualties per year. In August 1918, the Battle of Amiens (later called the 100 Days Battle) began, another endless siege. Then, another threat began – the Spanish Flu – eventually killing tens of millions, far more deaths than all World War I deaths combined.

How did the stock market respond?  There was a short retreat during the biggest flu death siege in the fall of 1918, followed by a huge market rally – the Dow rose 10.5% for all of 1918 and then +30.5% in 1919.

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

Here’s a brief summary of what happened at various historical anniversaries, and how the market reacted:

Let me close with the worst week of the worst year in our living memory – August 21-28, 1968.

On Wednesday, August 21, after the false hope of liberalization behind the Iron Curtain (dubbed “the Prague Spring”), Soviet tanks rolled into Prague, killing 72 and injuring over 700. Then, over the next weekend, France became the fifth nuclear club member, detonating a hydrogen bomb in the Pacific. Then riots dominated the Chicago Democratic National Convention, August 26-29, as police beat protestors.

How did the market react? It rose 1.1% in August, +3.9% in September, and +7.7% for the full year 1968.

Bad things happen. They always have. But the market tends not to react to the outside world as much as to corporate earnings. It’s as if the Zen Market Masters seem to be telling us, “This, too, shall pass.”

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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