Source: USAToday.com
Buckle Up – Stocks Are Going Higher From Here
Stocks have been on a wild rollercoaster ride throughout most of this year. But despite the 12% drop earlier in the year the S&P 500/SPDR S&P 500 ETF (NYSEARCA:SPY) has regained most of its lost ground, and is now only 3% below its all-time highs. Also, higher alpha names like the Russell 2000 and Nasdaq stocks are leading the way once again. In fact, the Russell 2000 (IWM) is now 6% above its pre-correction January high, and the Nasdaq 100 (QQQ) is now 4% above its pre-correction all-time high, suggesting the broader market average will likely follow higher going forward.
Source: StockCharts.com
In addition, the economic backdrop remains very strong, GDP looks set to expand robustly, and although trade tensions are likely to linger on, earnings season should be very strong. Therefore, stocks are likely to continue to climb the wall of worry, and should go substantially higher into year end.
About SPY
SPY is the first major and most popular ETF in the world. It's designed to mimic the exact movement of the S&P 500. The SPY index fund has roughly $275 billion in net assets, and each share in the fund represents a fraction of the holdings.
SPY provides investors with exposure to the S&P 500 index, which is widely regarded as the most significant stock market average for U.S. equities and possibly the world. Since SPY tracks the exact movements of the S&P 500, I will use SPY and the S&P 500 interchangeably throughout this article.
High Flyers Leading the Way Again
Despite SPY still trading below its January highs, small caps are substantially higher than where they were during the highs in January. In fact, 6% higher, and the IWM chart looks very constructive.
We can see a clear series of higher lows, as well as a higher high. In addition, the recent low was about 2% higher than January’s pre-correction high. Overall, this is very constructive, as small caps leading again is a healthy development and suggests the S&P 500 should follow with new highs soon.
We can see a similar image with the Nasdaq, a series of higher highs and higher lows, as the Nasdaq 100 is now 4% above its pre-correction high. Just like the Russell 2000 the Nasdaq looks intent on breaking out to new all-time highs following the recent dip. It appears like only a matter of time until SPY breaks out to new highs as well.
Economic Backdrop - Remains Strong
The U.S. economy appears to be very strong, and there are no concrete signals that suggest a slowdown is inevitable, or even likely. To the contrary, most of the economic indicators suggest the economy is relatively robust and the pace of economic expansion could even accelerate going forward. Employment, inflation, manufacturing, and other economic factors are indicative of an economy still in growth mode, and this growth cycle may be a lot farther from the finish line than is perceived by many market participants.
GDP Set to Expand Robustly
GDP is getting set to expand, not contract. Despite the slightly disappointing growth in Q1 (2%), GDP is likely to expand at a rapid pace next quarter, and likely after that as well. In fact, Q2 GDP growth is estimated to come in between 3.4 and 4%, with the average estimate pointing towards a 3.9% expansion rate. Q3 will also very likely be above 3% as average and median estimates call for expansion of 3.1%, and 3.2% respectively. This puts average growth at 3% for the first 3 quarters. Provided Q4 GDP comes in at a similar pace, annual GDP in 2018 will be around 3%. The last time the U.S. had annual GDP at or above 3% was in 2005, and as GDP expands, so should the S&P 500.
Source: Statista.com
Robust Earnings Season
It’s earnings season again, and many companies are about to report record results. Moreover, given the recent tax cuts, and relatively robust economic growth in the broader economy it is not likely that we will see a significant earnings slowdown any time within the next several quarters. This provides a substantial tailwind for stocks going forward, thus, SPY is likely to experience a notable rally into the end of the year.
Trade Tensions – Likely to Linger
Breakouts of trade tensions could send periodic shocks throughout markets like we’ve seen in past weeks. However, it is not likely that trade worries will lead to a major economic slowdown in the U.S., or worldwide for that matter any time soon. Recent trade tariffs with the EU and Canada amount to serval billion dollars worth of tradeable goods being taxed slightly more than they were previously. When we put it in context, a few billion worth of goods is relatively insignificant to the hundreds of billions worth of trade amongst the countries.
The retaliatory tariffs by the EU impact a narrow range of companies dealing mainly in peanut butter, orange juice, bourbon, and several other areas. In addition, U.S. imposed sanctions will benefit U.S. based steel companies and other crucial segments related to the U.S.’s manufacturing base.
The situation with China is a bit more serious as both countries have levied substantial sanctions against each other. Nevertheless, the U.S. remains in a much stronger position to capitalize on the trade skirmish. The U.S. still has the much bigger, stronger economy, and the trade imbalance of about $375 billion gives the U.S. much stronger leverage.
Source: MarketWatch.com
The U.S. exports far fewer products to China than it imports, about $130 billion to over $500 billion. So, by default it can impose tariffs on far more goods than China. Moreover, Chinese goods are swamping markets all over the world, and it is unclear where the excess Chinese products will go if not to the U.S., which will negatively impact China’s economy. However, the U.S. can make up for many of the Chinese imports by producing its own. This will be favorable to domestic corporations, and despite the higher inflation in the short term, longer term the “trade war” should be great for U.S.’s trade deals, U.S. manufacturing, and the U.S. economy in general.
Source: Statista.com
Stocks Set to Climb the Wall of Worry Again
It looks like stocks are set to continue to climb the wall of worry once again. Despite the trade tremors, and whatever other setbacks that may materialize, the economic backdrop remains very favorable for U.S. stocks, as most of the key economic data continues to come in better than expected. Moreover, GDP is set to advance at the fastest pace the U.S. economy has seen in over a decade, corporations should continue to report record profits, and higher alpha names are leading the way for stocks once again. The bottom line is that SPY and stocks in general are in a goldilocks type environment right now, and the second half of this year should provide a perfect ramp to propel stock prices substantially higher into year-end.
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Disclaimer: This article expresses solely my opinions, is produced for informational purposes only, and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please always conduct your own research and consider your investment decisions very carefully.
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