What's ahead for the stock market is always a matter of what's overhead, just like with the weather.
Right now, sunny days and a bright outlook for stocks are what we're seeing.
Due to the crazily volatile market conditions we've been suffering over the past few months, you might think that statement is nuts.
And maybe you're right...
But today, that's what the skies look like to me – and I'm going to make my case.
We're a little past the midyear 2018 mark, so let's use today's report to review.
I'll tell you about what I've seen in the market "weather" the past half-year or so.
I'll share with you my forecast for the near future.
Finally, and most importantly, I'll tell you what you can do to make sure that you're milking this sunny outlook for all it's worth...
We're Approaching All-Time Highs
Since March 2009, central bank stimulus, powered into overdrive by extraordinary and unprecedented quantitative easing programs, effectively solar-powered stocks higher.
Artificially depressed interest rates, driven to record lows in the United States and into negative territory in Europe and Japan, drove yield-seeking investors into riskier assets (that is, equities... stocks).
The Federal Reserve's articulated policy was to lift stock prices to enhance corporations' equity capital and promote a "wealth effect," whereby rising stock markets and reinvigorated retirement accounts would stimulate consumer confidence and spending.
It worked.
From market lows in March 2009, the Dow Jones Industrial Average is up 290%, the S&P 500 is up 322%, and the Nasdaq Composite is up 522%.
Even with the Fed ending bond and asset purchase programs, unwinding their balance sheet, and raising rates, stock markets have enough stored power to keep going higher – courtesy of strong earnings growth and demand.
Earnings, the bottom line in equity valuation, have been rising steadily.
In the second quarter of 2018 (the last reporting period), earnings are up an average of 24.6% over the second quarter of 2017, with more than 92% of companies in the S&P 500 reporting.
That makes three quarters in a row where earnings have risen by double digits.
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On a price-earnings (P/E) basis, a multiple of how much investors are paying for earnings, the forward P/E for the S&P 500 (based on estimates for earnings looking forward 12 months) in January 2018 was 18.6.
The long-term historical average forward P/E for the S&P 500 is 17. As of the latest earnings reporting period, the S&P 500's forward P/E is 16.7.
That shows earnings are rising faster than the price of stocks.
In other words, equities aren't overvalued – even though they're approaching all-time highs again.
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Even naysayers who believe earnings have peaked must concede the market can keep going higher.
In the 1980s, earnings peaked in the second quarter of 1989, but the market powered ahead and peaked in May 1990 – almost a year later.
In the 1990s, earnings peaked in the fourth quarter of 2000, but the market peaked the following August.
In the 2000s, earnings peaked in the second quarter of 2007, but the market peaked in September 2007 – and didn't implode for another year.
As long as interest rates remain low, equities will remain a better return vehicle – especially given the market's average yearly appreciation. And interest rates will remain low because the Fed isn't about to raise rates enough to cause equity markets to fall and wipe out the wealth effect they continuously support.
The Dow Jones returned an average of 7.75% a year (not including dividends) from 1921 through 2017.
From 2009 through 2017, the Dow appreciated an average of 12.5% per year.
Strong earnings, especially in market-leadership stocks exhibited most obviously by big-name tech stocks and the Nasdaq Composite's stellar performance since 2009, will continue to keep valuations in check, keep active investors adding to their positions, and keep sidelined investors coming into the market (probably into passive investment vehicles).
Here's What "Mr. IPO" Has to Say
Besides outright demand-driven buying, market supply and demand issues portend a long and steep uptrend for stocks.
It's a straightforward equation: More demand chasing fewer stocks leads to rising prices.
U.S. markets haven't seen an annual net increase in shares outstanding since 2000.
The reduced number of initial public offerings, bankruptcies, mergers and acquisitions, and trillions of dollars of share buybacks over the past 15 years have reduced the supply of equity shares for investors.
In fact, total shares outstanding would be shrinking alarmingly if it wasn't for options issuance by companies to compensate employees.
But options issuance isn't the same thing as more equity shares being offered by more companies.
According to University of Florida Professor Jay Ritter – known as "Mr. IPO" for his work on initial public offerings – in 1997, there were 7,600 publicly listed companies on U.S. exchanges. Today, there are 3,600.
At the same time, there's more capital being created every day.
Equity market appreciation alone has created capital that investors often plow back into stocks. Stronger earnings translate into profits and capital creation for companies and also for investors receiving dividends.
Global growth increases capital worldwide. Investors everywhere, looking for higher-yielding opportunities and mostly facing depressed interest rates on fixed-income instruments, are increasingly turning to equity markets in search of robust returns.
That means demand will continue to increase, overwhelming new issuance and reduced shares outstanding, and continue to fuel steadily rising stock markets.
That's why the sun's been shining on stocks and why equity markets have such a bright future.
However, that doesn't mean there aren't storms brewing and investor selling won't dampen rising markets from time to time.
That's always going to happen.
There's Always a Storm in the Distance
The near-horizon storm that's already throwing water on U.S. markets' recent ascent to yet higher all-time highs is the implosion of Turkey's currency, the lira.
Turkey has just over $198 billion of dollar-denominated debt on the books of non-bank borrowers.
The lira's recent drop makes paying debt service in U.S. dollars three times as costly as it was just a few weeks ago.
Turkish borrowers have problems paying debt service. That's obvious.
Plus, several large European banks – including Spain's BBVA, Italy's UniCredit, and France's BNP Paribas – have significant loan exposure to Turkey and direct exposure in the form of ownership in some of Turkey's biggest banks.
This summer storm is a worrisome sign for U.S. equity markets, and an even bigger storm facing emerging markets and European markets.
The last two emerging-market storms – the July 1997 surprise devaluation of the Thai baht that led to the first "Asian contagion," and then the August 1998 Russian ruble devaluation and partial government default – sent U.S. markets into tailspins.
So, there's always a storm somewhere on one horizon or another, and there's always a chance that stocks will take a hit as panicked investors take profits and hedge funds and aggressive traders short stocks to profit from whatever negative feedback loops they can create or pile onto.
But storms are storms. They are not the prevailing weather pattern equity markets have been enjoying.
In fact, we've been watching the forecast closely in my elite research service, Zenith Trading Circle.
At Zenith, we follow a unique, obscure type of play, called a "carbon trade," that gives members the opportunity to understand and track market conditions and – here's the good part – get the chance to rake in the profits...
No matter what the market's "weather" is looking like.
In fact, my methods have given members the opportunity to see more than 6,160% in total winning gains since I first took over Zenith Trading Circle in April of last year.
And I'm calling for sunny, ascending markets – with only a chance of passing showers.
Click here to learn more.
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The post Midyear Market Forecast: Mostly Sunny With a Chance of a Passing Shower appeared first on Wall Street Insights & Indictments.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.