LPL: Three Things That Scare Us
Friday, April 16, 2021
The bull market rally continues and the economic data keeps getting better and better. Things do look really good here and if you’ve followed us long enough, then you know we’ve been expecting an improving economy and continued strong equity prices. Still, there are always worries lurking out there and this week in the latest LPL Street View video LPL Chief Market Strategist Ryan Detrick discussed three things that scare us.
The first worst worry is, are things too good? A year ago things were horrible, yet that was one of the best buying opportunities in history. Now could there be a contrarian worry given how good things are? For instance, recent Manufacturing PMI data showed the highest level since 1983, with Services PMI at an all-time high. We took a look at 3 and 6-months after previous high levels of manufacturing actually ushered in flat to negative S&P 500 Index returns. We will discuss these concepts in more detail in our next Weekly Market Commentary due out on Monday.
The next worry is stocks aren’t cheap. In fact, looking at forward 12-month S&P 500 earnings shows stocks are as expensive as they’ve been since the late 1990s. “This doesn’t mean a new bear market will start tomorrow just because multiples are as expensive as they’ve been since the late ‘90s, but it does say things are priced close to perfection. Any negative economic or COVID-19 news could open the door to more of a correction given the pricey valuations,” explained LPL Financial Chief Market Strategist Ryan Detrick.
Lastly, the calendar is our third worry. The worst six months of the year are around the corner with the well-known “Sell in May” period just a few weeks away. Then as the LPL Chart of the Day shows, the S&P 500 during the current bull market is nearly tracking the 2009/2010 bull market to a tee. Looking back at that bull market, it peaked around now before a 16% correction into the summer months. We aren’t saying there will be a 16% correction this time, but we are saying after an 80% move in just over a year, let’s be realistic that some type of ‘second year of a bull market’ volatility could be in the cards, especially when factoring in the calendar.