We still think margins can be in the 10% range, which is shocking 10 years into a cycle. Even if they slip to 9%, they’re still 50% above their long-term averages.
In this week’s Market Signals podcast, the discussion centers on moving equity allocation to market weight, the bond market, and some positive economic news.
Stocks are up 12% for the year — and more than 20% from December, as of March 22, 2019. Combined with weakening economic data and corporate profit outlooks, the LPL strategists have readjusted domestic equity allocations back to market weight. They note this doesn’t mean they expect a retest of the December lows. Nor are they calling for an end to the bull market or the economic cycle of growth. However, they believe the risk-reward trade-off for stocks has become a bit less attractive.
Last week’s global equity weakness generated lower yields. The German 10-year Bund yielded sub-0% for the first time since 2016. There were also new all-time lows in 10-year yields in Australia and New Zealand. In addition, part of the yield curve in the US moved to inverted.
It’s important to pay attention to these worries. But even as the global economy struggles with intensifying trade and political risks, US fundamentals remain quite strong.
There are more positives out there. The LPL strategists note that 12-month S&P 500 earnings per share have started to increase. Coincident data for retail sales, jobs, and industrial production have all been weak. However, more leading economic data, such as housing and consumer confidence, have significantly improved over the past few months.
The 3-month/10-year yield curve inverted last week, meaning yields on the shorter-term 3-month T-bills were greater than the 10-year Treasury notes. Historically, since 1955, this yield curve inverted ahead of all nine recessions. We would rather focus on the 2-10 year yield curve though, as it hasn’t yet inverted. Additionally, even after it inverts, that doesn’t mean a recession is imminent. In fact, the S&P 500 has usually peaked 19 months later and had gained more than 22% on average.
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