Studying S&P 500 performance since the 2008 global financial crisis, we notice that all sectors provided decent returns until the 2011 Eurozone debt crisis. After that Technology and Consumer Discretionary had a strong rally due to solid expansion in economic activity worldwide. Since the mid-2014, the energy sector and material sector have been showing weakness as US dollar became stronger when Fed stopped quantitative easing. Higher dollar negatively affects major commodity prices. Investors should keep an eye on these inflection points.
The broader market S&P 500 Index fell 6.2% in 2018. The healthcare sector performed best maintaining its defensive stance gaining 6.2%. The utilities returned 4% meeting expectations of high dividend paying stocks. The energy sector fell by 18.2% in 2018 due to large fluctuation in crude oil prices and was an exception!
By analyzing the past 10-years data, we observe that higher the risk, higher the return is not necessarily true for all S&P sectors. In the case of Energy and Financial sectors, we see returns are not aligned with risks as their standard deviation, a measure of risk, are much higher than expectation. The Fed’s policy changes impacted the Financial sector and the Energy sector was mainly impacted by geopolitical events.
The Energy and Technology Sector shows the lowest correlation of 54.3% during the last 10 years. The highest correlation of 98.9 was between Consumer Discretionary and Industrial Sector. What is surprising is the strong correlations between sectors except for Energy Sector!
Consumer discretionary (XLY) and the technology sector (XLK) showed a great performance in the last 10 years and returned 359% and 288%, respectively. The solid improvement in the FANG stocks (Facebook, Amazon, Netflix and Google) helped these sectors provide the strong returns.
Global Gasoline Prices: Hong Kong Pays 264x More Than Venezuela!
Crude oil has a significant negative correlation with the dollar index for years. By analyzing past 30 years of data from Zdaly World Data, we obtained the correlation between the US dollar index and crude oil of -76%. In various past events, we have seen that when the dollar index became stronger, how the crude oil prices fell. In the present scenario, the dollar index is rising due to the Fed’s faster interest hike process. It could drag down the crude oil prices!
Back in 1988, gold was $465 per ounce, crude oil $17.13 per barrel and the S&P 500 index stood at 257. Over the last thirty years, these three assets returned 1.6x, 3x, and 10x respectively. Looking at 30 years of data of gold price, crude oil price and stock market, we found the highest correlation being between crude oil and gold at 81%. By using Zdaly’s statistical platform, we also found that gold prices lag S&P 500 index by six months!
Housing prices across the major US cities have increased in the past 25 years. However, looking at last 10 years only, that is not the case! It could be the aftermath impact of the 2008 subprime crisis. By analyzing the past 25 years of data from Zdaly World Data, we find that San Francisco has shown the highest growth rate of 166% while Chicago has shown the lowest growth rate of 24%. By analyzing past 10 years of data, we observe that Denver has the highest growth rate of 18% while Chicago shows a decline of 34%.
The US consumer sentiment has been improving gradually after making a record low of 55.3 in November 2008. This improving index is signalling that consumers’ expectations about the current and long-term economic conditions as well as their financial conditions are also improving. The interest rate hike is appropriate when there is a strong economic move.
Valuation plays a crucial role in the market movement. The broader equity market S&P 500 Index is currently trading at a price-to-earnings multiple of 21x which is higher than the historical 50-years mean of 17.6x.
Consumer sentiment is an important leading economic indicator and it is reflected in the performance of the stock market. By analyzing past 38 years of data using @Zdaly World Data, we found that the stock market lags consumer sentiment by one month and with this lag the correlation is 24.6%. The current rising consumer sentiment signals continuation of the bull market. In various past events, we have seen that when the dollar index became stronger, how the crude oil prices fell. In the present scenario, the dollar index is rising due to the Fed’s faster interest hike process. It could drag down the crude oil prices!
The implementation of various policy reforms in the first couple of years during the first term of a US President results in better GDP growth in 3rd and 4th year as shown below leveraging @Zdaly World Data for the last 9 US Presidents. The first two years of Trump Presidency already has produced better economic growth than the average of the last 9 Presidents. President Trump’s tax reform and improved government spending bills are helping the economy at a large. Historic data would indicate that better GDP growth is yet to come.
Historically there is a correlation between US Presidents’ year in office and the stock market. Analyzing the past 38 years of data, we found that the US market returned an average of 12% in the first year of Presidential term, 9.9% in second year, 9.6% in third year and a paltry 5.1% in the fourth year. President Trump’s first year has produced large stock market returns consistent with historic returns. Second year is questionable given wide swings in the market. Also, the bull market is aging. History would cause concern regarding performance of the stock market for the remaining term of Trump’s presidency.
Interesting to compare India and China. Both started at the same point 50 years ago with approximately same population and similar GDP. Both economy grew though at different rates. The accumulated difference after 50 years resulted in remarkably different per capita income!
The recent performance of the US and China shows that China’s market impact due to tariffs is much larger than the US. The Shanghai Composite Index fell 18.5% between March 01, 2018 and October 22, 2018. However, the S&P 500 Index improved 3.4% during the same time period. To say US is winning is premature. There are no winners in trade war!
Since the announcements of tariffs, currencies of both the US and China have fluctuated a lot. The US dollar index became stronger against all major currencies rising 6.7% between March 01, 2018 and October 26, 2018. However, China’s Yuan depreciated against the US dollar nearly 8.5% during the same period. As per the World Bank data, exports represent 19.75% of China’s GDP while imports represent 18% of China’s GDP. Currency depreciation helps the country’s export business. Earlier in August 2015, China devalued its currency two times to increase its export competitiveness. The currency devaluation is an artificial process indicating an action taken by the government. Will China again devalue?
Economic theory holds that the industrialized First-World countries import raw materials from third-world countries and export to them high-tech items. How is it then that US major import from China is Electronics and exports are commodities such as Soybean? Trend over the last twenty years are alarming: Dollar volume growing substantially and the trade deficit expanding !
The trade value between both US and China has grown gradually over the last three decades. The US’s total exports to China stood at $187.5 billion as of 2017. The US’s total imports from China stood at $522.9 billion. This data shows that US has large dependence on China. Trading between countries improves the purchasing power of the populous in both countries. Tariffs by reducing trade hurt both countries in general with disproportionate share for industries/commodities affected by the tariffs. All unfortunate!
The word ‘trade war’ creates a panic situation in everyone’s mind. Market might not have seen the impact of recent trade war till now. However, history says that the impact could be devastating.
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