Equity Pullbacks Are Part of Every Recovery Year

Despite rebounding gaining 0.5% on January 25, the S&P; 500 is still down 4.6% from its January 19 cyclical high of 1150. At this juncture, it is important to keep in mind that equity pullbacks are part of every economic recovery. As the table below shows, the amplitude of the average pullback twelve months after the end of a recession is13%, or
8.8% if we exclude 2001. The reason we do not view the 2001 episode  (-33.8%) as a probable scenario this time around is back then, the S&P; 500 was trading at 21 times forward earnings. This is well above the current valuations of around 14 times. As such, we would not expect to see a larger-than-average recovery pullback in the coming months. The improving economic backdrop remains supportive of equities.



BUY LOW-SELL HIGH: Emerging Markets Appear Fully Priced

Short history chart but nevertheless very telling and compelling from my standpoint.

Emerging market stocks are no longer cheap and already reflect a lot of good news, leaving them vulnerable to even minor disappointments.
Emerging market (EM) equity multiples have moved significantly higher in recent months, based on various valuation measures. A further multiple expansion in the developing markets would represent an overshoot of valuations from fundamentals. Indeed, there are two potential scenarios for EM stock prices: either a full-fledged mania will develop with multiples continuing to expand, or, a setback/period of indigestion will occur before a new upleg develops. Currently, the odds of a mania-type pattern developing in emerging markets are not significant. If a mania were to develop, Chinese stocks would be at the epicenter because China has the fastest growth rate. However, Chinese share prices (both domestic and investible stocks) have been trending sideways since July, and the investible market has underperformed the emerging market benchmark. Bottom line: At current valuations, EM stocks will be increasingly vulnerable to even minor negative surprises. Stay tuned.

BCA Research



Yesterday, I published the traditional new year post on the January Barometer.

Barron’s Michael Santoli has a piece that covers another angle:

Reaching a bit more deeply into the almanac, market historian and author John K. Harris toted up how a new year proceeded when the market’s high point for the preceding year was reached in December, as it was in ’09.

In the 82-year history of the S&P; 500 index, a year’s high has occurred in December 25 times, says Harris. For the 24 excluding ’09, 18 were followed by positive Januarys, and the average return for those years was 17.2%. Six of the 24 were followed by negative Januarys, and the average return for those years was -3.5%.

The year’s high has occurred after Christmas 14 times, Harris says. Again, the most recent case is 2009. The prior 13 years that had a post-Christmas high were followed by nine positive Januarys, and the average return for those years was 19.4%. Four of the 13 years were followed by negative Januarys, and the average return for those years was a mere 0.6%.(…)

Pretty good odds if this is your cup of tea.


Day One Joys

First time I hear about that one. From Floyd Norris’ blog at the NYT

(…) Howard Silverblatt, the data maven at Standard & Poor’s, has pointed out that an investor who bought the S.&P.; 500 stocks at the close of the last trading day of each months in the decade just ended, and sold at the close on the first trading day of the next month, would have earned 23 percent on his money in the Zero decade. (That figure ignores dividends and trading costs, as well as the interest that could have been earned by putting the money in T-bills the other days.)

For the entire decade, the index was down 24.1 percent, again ignoring dividends and transaction costs.

I checked out previous decades, and found the zero’s were extraordinary, but that the pattern is not a new one.

The first days of each month did better than the average day in the 1930’s, 1940s, 1950s, 1960s, 1970s and 1990s. Every decade the S.&P.; has been around, that is, except the 1980s.(…)