Will the Equity Markets Continue to Grow?

October 10, 2018

Keywords: Equity, Risk Mitigation, Valuations, Economic News

With the recent volatility in the equity market, investors are trying to understand what’s happening now and what comes next. How long can the equities market keep improving?

The current bull market began in March 2009, but there have been significant gains in recent years following a low period in early 2016. Throughout the ascent there has been speculation that we’ve reached the “blow-off top” and the bull-run is set to end. There are compelling arguments on the side of both optimism and pessimism.

Our analysis still leans moderately bullish, based on the current trajectory. Here’s why.

Current Equities Status

Overall, the S&P 500 is up more than 330 percent since the beginning of the bull market. S&P 500 shares are valued at 16.8 times earnings, which is viewed as fair by many because the price-to-earnings ratio is close to the 16.1 average multiple from the past quarter-century.

While the S&P 500 just had its best quarterly performance in five years, gaining 7.2 percent in the third quarter, just 65 percent of its members are higher than the 200-day moving average. In January, 84 percent of its members were above that mark.

This could imply general market concern regarding actions taken by or the policy of the Federal Reserve, or the future prospects for economic growth. Prices can be affected by the suggestion that the risks in either category are not appropriately accounted for in today’s markets. "

Signs for Continued Growth

So will it continue to grow through the end of this year and into the next? While the crystal ball is cloudy, we believe that specific recent economic performances and leading indicators signal continued potential.

Strong corporate earnings have astounded analysts this year. Earnings reports for the second straight quarter showed 25 percent growth, the highest levels since the third quarter of 2010. Corporate revenue alone has grown between 8-10 percent quarterly in 2018.

The Leading Economic Index (leading indicators for the economy), which helps forecast U.S. economic conditions, hit the highest levels on record in the third quarter. Strong Gross Domestic Product numbers and a soaring report on the non-manufacturing sector from the Institute for Supply Management should provide the needed runway for continued expansion. And with a new trade deal between the U.S., Canada and Mexico looming, we see more positive signs for market potential.

A Word of Caution

However, it is important to remember that this is the longest bull market on record and markets don’t continue to run up forever. While we may not be quite to the end of the game, we do see signs of market stress. Maintaining an appropriately diversified portfolio with an allocation to risk mitigating strategies will be even more important as we enter 2019.

Disclosures

This material is for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expresses may change as subsequent conditions vary. The information herein is based on sources which Miles Capital believes to be reliable, but is not guaranteed to be accurate or complete.

Past performance is not a guarantee of future results. There is no guarantee that any forecasts made will come to pass. There is potential for profit or loss with any investment. Index performance is shown for illustrative purposes only — you cannot invest directly in an index. No part of this material may be reproduced in any form, or referred to in any publication without the express written permission of Miles Capital, Inc.