After a strong performance last week, the C Fund that tracks the S&P 500 has passed over key resistance levels. It is now about 4% away from its all-time highs set in September 2018.
The Dow Jones Completion index, which the S Fund tracks, is a bit below its 2019 high and still about 8% away from its all-time highs set in 2018.
The MSCI EAFE index, tracked by the I Fund, is at 2019 highs but is still about 15% away from its all-time highs in early 2018. The actual I Fund is only about 10% below its all-time highs due to reinvested dividends since those highs were reached.
The cyclically-adjusted price-to-earnings (CAPE) ratio of the S&P 500 is back above 30x after this multi-month rally, which makes the United States one of the most expensive stock markets in the world relative to the past ten years of corporate earnings.
The ratio of stock market capitalization to GDP is back up to 139%, which is about 9 points shy of its all-time high level set in 2000. The following chart shows the total value of U.S. companies (blue line) compared to GDP (red line):
The GDP result for the first quarter of 2019 might come in very low due in part to the government shutdown. The Atlanta Fed has a surprisingly low GDPNow forecast of 0.4% GDP growth for the quarter based on current data, while consensus estimates are around 1.5%:
Historically, this Atlanta Fed model has been rather accurate at forecasting quarterly GDP. Their results match up pretty closely with the Bureau of Economic Analysis initial estimates that come out after the quarter ends:
As you can see, it’s not too unusual to have a weak quarter here and there. A recession is defined as two negative quarters in a row.
Most consensus estimates call for a rebound in GDP after this quarter, perhaps pushing up to 2.5% for the year. Overall, estimating GDP over a full year is challenging because circumstances can change rapidly to the upside or downside as the year progresses.
Most investors get scared when stock prices fall and become comfortable when stock prices push to high levels, but in reality, risk becomes elevated as stocks become expensive. Rather than being a time for complacency, this is an ideal time to make sure your portfolio is appropriately diversified for your age, risk tolerance, and personal circumstances.
We could push to new all-time highs in the markets, or we could encounter more volatility to the downside, and it’s important to be well-positioned and mentally prepared for a variety of possible outcomes as we get deeper into the year.
April may be a challenging time in the market because companies will be reporting their results for the first quarter of 2019. All through last year, quarterly reports generally showed huge earnings growth, because they were taking into account recent corporate tax cuts for the first time, which give them very favorable comparisons to their equivalent quarter in 2017 which was under the previous higher-tax system. This period in 2019 will be the first quarter where corporate results will be compared to a previous year’s quarter that already has the tax cut effects included as well, so it’ll be a tougher comparison this time around.