What a year! The TSX is near the top of the global market leaderboard, up +25% and the Blue Jays are into the American League Championship Series. If you can get over the tariffs, the economy nearing stall speed, the macro uncertainty, and the general grumpiness that seems to be impacting most populations, otherwise it’s been a great year.
Perhaps the most recurring question we receive is: how are markets up so much and, more importantly, can it keep going? This may be an opportune time to let the Blue Jays provide some guidance.
Just because something goes up doesn’t mean it has to come back down. However, when markets move in a big way, there is often a gravitational pull or reversion to the mean that could cool future return expectations. The chart below captures the issue, looking at the three-year trailing total return of major equity markets. A three-year gain of +81% for the TSX, +96% for the S&P and +87% for international markets is remarkable. As you can see, there have been returns higher than this, but never in the past 25 years have all three simultaneously been over 80%.
Just because the market is up a lot doesn’t mean it can’t keep going, but we believe we’re in somewhat uncharted territory. As we highlighted in a recent Ethos, some solid macro fundamentals are driving or supporting this market advance and resilience. Those include improving economic data, as well as inflation not accelerating, which allows bond yields to come down and helps multiple expansion. And revisions have ticked higher as we head into earnings season, with the last two having a higher proportion of positive surprises compared to the norm. Still, this advance is pretty extreme at this point.
Perhaps even more puzzlingly, nobody is happy. There was a time when strong equity markets made people celebrate, but that doesn’t seem to be the norm anymore. The University of Michigan Consumer Sentiment captures consumer attitudes towards personal finances, general business conditions, and market conditions. This survey has historically tracked well directionally with the S&P 500. The puzzling aspect is that, with markets up so much, why is consumer sentiment worse than during the depths of the financial crisis?
We’re not saying the world is perfect, but it isn’t as dire as sentiment would imply. Rising markets just don’t make people as happy as they used to. This is a cautionary signal for markets.
Final Thoughts
Back to baseball: the Jays had the lowest strikeout rate this year at 6.8 per game, and we believe this is the strategy investors should tilt towards after such strong gains. This isn’t the time to try and swing for a homer or even a double; the goal should be to avoid striking out. Give us a single or a walk.
So what does that mean for portfolios? Well, we all want markets to continue moving higher, and that may occur. However, if history holds, the risks may have turned up, not because the news has necessarily gotten worse, but simply because the gains have been so strong.
We believe in tilting more to strategies that will deliver a nice single on top of already realized gains if this rally does continue. Those more defensive plays should have a lower risk of striking out or giving back too much of the gains in case market gravity kicks in.
— Craig Basinger is the Chief Market Strategist at Purpose Investments (special thanks to Jeff Gans from Advisor Solutions by Purpose for the baseball analogy idea).
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