Bulls head into the strongest two months of the year with tailwind

All four major stock market indexes closed February with gains of at least 3% for the month.

For the year so far, the Dow and S&P 500 are both up 11% — their best start since 1987, according to Dow Jones Market Data. The Nasdaq 100 is up 12% in 2019, and the Russell 2000 is up a whopping 17%.

The big divide in the market since the start of the slide late last year has not been growth vs. value or big vs. small. Rather, it’s been between low- and high-volatility stocks. And the winners probably aren’t the ones the one you’d expect.

The S&P 500 Low Volatility Fund (SPLV) is up 5.1% since the market last peaked at the start of October last year. Meanwhile its mirror image, S&P 500 High Beta Fund (SPHB) is still down 7.5%.

This differential is very cool to watch play out live, not to mention meaningful.

• Low-volatility stocks include most utilities (XLU), real estate trusts (XRE) and some health care (XLV).
• High-volatility stocks include techs (XLK) and industrials (XLI).

Even if the market slows its recent ascent, I suspect low-volatility stocks will outshine their racier peers.

Those are exactly the kind of stocks I recommend in my Power Elite newsletter. Earlier today, I sent my subscribers seven “boring” stocks whose yearly returns are nothing short of extraordinary. You’ll be just in time to invest alongside us if you click this link today.

Now let’s look forward to the new month that begins today.

The Dow has logged an average gain of 0.52% in March over the last 100 years … 1.12% in March over the last 50 years … and 1.47% over the last 20 years, according to Bespoke Investment Group data.

February was a good month for bulls, to be sure. Even better, the combo of March and April has historically been the best two-month stretch on the calendar.

Below is a look by Bespoke at all years since 1928 for the S&P 500 that saw the index gain more than 10% over the first two months of the year.

In this context, 2019 has witnessed the fifth-strongest start to a year on record. You have to go back to 1987 to find a stronger January-February one-two punch.

While March has been up in five of the six previous years that saw a 10%+ gain through two months, the one down March that came in 1931 was a doozy.

As you can see, 1931 and 2019 are the only two years that saw the S&P decline 10%+ in the prior Q4, only to gain 10%+ over the first two months of the year.

Bespoke concludes: Let’s hope 2019 doesn’t play out like the rest of 1931 did.

As for sectors …

The Industrials have led the way in 2019 with a year-to-date gain of 18.3%. Technology has achieved second place at +14.4%, followed by Energy (+13.3%), Real Estate (+12.5%) and Financials (+11.3%).

Health Care is up the least year-to-date with a gain of 6%, which is still awesome.

Market internals are quite strong right now, with robust breadth despite the setback of the past few days. Almost 90% of S&P 500 stocks are trading above their 50-day moving averages.

Bottom line is that, unless investors decide to freak out over the slowing global and U.S. economy — or else there’s a bad conclusion to the China talks — March should keep up the recent pace.

Especially because the Fed isn’t expected to rock stocks’ collective boat anytime soon …

The most important development in the world of economic data and policy this week occurred in Washington, where Federal Reserve Chairman Jerome Powell affirmed the central bank’s go-slow approach to future interest-rate changes.

Powell told the Senate Banking Committee it’s a “good time to be patient and watch and wait and see how the situation evolves.”

In my view, “patient” understates the path forward. I think the Fed is done raising rates for this cycle.

Related post: Low-volatility stocks stun the Street with new highs

With GDP growth slowing below potential, it’s fair to expect the Fed to end its balance sheet run-down later this year and even start cutting rates by 2020. They might be forced to start raising rates as soon as midsummer.

Powell justified the Fed’s caution as a response to recent financial market volatility, weaker growth in the euro-zone and China, and the softening in domestic inflation. He also emphasized that any future policy moves would be “data-dependent.”

Capital Economics analysts point out that Powell stopped short of echoing recent dovish comments from New York Fed President John Williams, who suggested GDP growth or inflation would have to materially surprise on the upside to warrant further rate hikes this year.

The minutes to the January FOMC meeting revealed that “several” officials shared that view, although “several other” participants thought another rate hike could be appropriate if the economy evolved as expected.

Still it’s becoming increasingly clear that the Fed is unlikely to raise interest rates again this cycle. Serious signs of weakness have emerged in the domestic economy, ranging from the horrible December retail sales followed by weakness in industrial production and durable orders.

Home Depot’s (HD) earnings miss midweek was no accident. It now looks like growth will drop below the economy’s 2% potential rate in the first quarter.

A dragged-out slowdown over the course of this year ought to persuade the Fed to begin cutting rates again by early 2020 if not sooner.

The stock market was trying to discount this possibility late last year, and may have to test its assumptions one more time before moving too much further forward.

Best wishes,
Jon D. Markman