Interim volatility? No problem. This bull market is not ready to be put to pasture.
May 25, 2018
Shashi Mehrotra is the Chief Operating Officer and Chief Investment Officer of Legend Advisory and a pioneer in the application of artificial intelligence to the field of investment management.
He is the chief designer of Legend's Asset Allocation Neural Network (AANN). AANN is a sophisticated computer model that uses mathematical algorithms to forecast the relative strengths of different asset classes. Mr. Mehrotra spent over a decade on the research, development, testing and implementation of AANN's state-of-the-art artificial intelligence system.
May 2018 Market Commentary
We continue to maintain a bullish outlook on the markets in spite of some volatility and brief market corrections. The global bull market in particular appears to be intact and our signals indicate global equities may continue to gain momentum. The interim volatility we have been experiencing should continue. While the recent rally is encouraging, we feel that the necessary upward breadth thrust has been lacking. That means we haven’t experienced the same vigor with the upside volume as we did with downside volume when the markets started declining at the end of January. That being said, we do believe that the downside will be limited and doesn’t indicate the beginning of a bear market.
A few aspects of the recent volatility have caused us to look past and retain a bullish outlook. First, buy-backs started to get in vogue again since the steep sell-off in February, which was a catalyst to this market correction. That could certainly increase earnings per share. While these fluctuations can be frustrating to investors, we think that the S&P 500 could stay within a 15% range for the next few months, meaning the highs and the lows shouldn’t be so extreme that they are cause for alarm. Therefore, this volatility may continue until September or even October and then resume an uptrend towards the end of the year.
The second condition which typically coincides with volatility is the mid-term election year. Historically, the middle of the year is very volatile, but the end of the year generally involves a rally.
Thirdly, the fundamental and economic indicators that are coming in appear to reflect a synchronized global expansion. Global GDP growth can exceed 3.5% and domestic growth could also get close to 3%. The U.S. tax cuts are likely going to have a positive impact on earnings-per-share gains. We believe that some analysts are overthinking this tax cut, where even a ‘back of the envelope’ calculation indicates an earnings increase. With further research, many analysts, including ours, agree the 2018 EPS growth forecast should be strong thanks not only to corporate tax cuts but also due to a rise in profit expectations.
All of these factors are why we’re not surprised we’re seeing the recent volatility and expect it to resolve itself and pave the way for a rally during the end of this year. Twists and turns are part of the investing path. We remain focused on our destination and carefully navigating toward what we believe is the best course to reach it.
Shashi Mehrotra, Chartered Financial Analyst, is the Chief Operating Officer and Chief Investment Officer of Legend Advisory. The opinions and predictions expressed herein are those of Shashi Mehrotra solely and not necessarily the opinions or expectations of Legend Advisory or any of its affiliates. Such opinions and predictions are as of May 22, 2018, and are subject to change at any time based on market and other conditions. No predictions or forecasts can be guaranteed.
Current market and economic data is as-of May 22, 2018. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.
Important Disclosures and Definitions
The opinions and material presented are provided for informational purposes only. No person or system can predict the market. Neither asset allocation nor diversification guarantee a profit or protect against a loss. All investments are subject to risk, including the risk of principal loss.
The investment return and principal value of an investment will fluctuate, and an investor’s shares, when redeemed, may be worth more or less than their original cost.
The S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. Investors cannot invest directly in an index.
Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as one of the indicators of a company's profitability.
Past performance is no guarantee of future results.