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Treasury Bonds Rally as Stocks and Commodities Sink
Are more losses ahead? In short, if one knew nothing about market history, seasonal patterns, or valuations, it’s just good practice for investors to expect short-term losses and volatility but positive long-term gains. That’s why money needed for near-term liabilities should never be invested in the stock market.
Still, what’s the market likely to do in the months ahead? From a seasonal perspective, the stock market is now entering the strongest time of the year. In fact, October is often called the “bear market killer.” Of course, this is no guarantee of gains – the last quarter of 2008 is one good counter-example. But it suggests the near-term odds (and of course long-term odds) recommend remaining invested and staying the course with an appropriately balanced portfolio.
So, why is the stock market down? Popular explanations for the recent losses continue to include the concern that the Chinese economy is slowing (it is, but overall growth is still very strong), and the Federal Reserve (Fed) will raise short-term rates (it hasn’t, but it eventually will). Both theories are very well known and, quite frankly, overrated.
What’s not overrated, however, is that corporate earnings have been falling for some time and are now negative year-over-year. Corporate profitability is what investors should be interested in and focused on in the near term.
Currently, only 37% of publicly traded companies have increased their revenue forecasts over the last two
quarters – the fewest companies to increase their forecasts since 2009 and nearly as few as the worst of the dot-com bust in 2001. Median sales growth estimates for the next 12 months are currently just 4% compared to the historical growth rate of 7%.
My expectation is that earnings growth in the U.S. will eventually settle into a below-average range, albeit positive, just like the overall economy. The leading reason, in my opinion, is overall growth prospects will remain challenged due to high overall debt levels (both government and corporate) within the economy. Historical studies (i.e., Reinhart/Rogoff) have shown that highly indebted countries tend to have below-average economic growth. In fact, back in 2011, Reinhart and Rogoff were expecting 10 years of slow growth. So far, their outlook has been accurate – and it’s reasonable to expect it to remain so moving forward.
Meanwhile, we continue to expect that better growth in the year(s) ahead will be found in international economies and markets.Though favoring international has not benefited CLS portfolios in recent times, international markets still offer better growth prospects, lower valuations (i.e., they’re “on sale”), and have more accommodative central banks. Thus, our return expectations for international stocks remain substantially higher than U.S. stocks in the years ahead, and we continue to have strong conviction tilts toward them.
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