Ten Years and Counting
Written by Martin Shields
It was ten years ago on Monday, March 9, 2009 that the stock market hit its low during the great recession. The bull market that started with the S&P 500 index at 677 has provided investors with a total return of over 400% and has beat the duration of all other bull markets. It is important to celebrate these milestones which show the importance of being a long-term investor and not trying to time the markets. It is also important to evaluate where we are now in the market and business cycle and what is needed for this bull market to continue.
The stock market for 2019 started off strong with the S&P 500 index up more than 12% for the year as of March 11th. This strong performance is driven by several factors: the Federal Reserve’s indication that they will probably not raise rates this year, the end of the government shutdown, and progress towards a trade deal between China and the U.S. It is safe to say that the markets have priced in much of the good news and we will need to see real progress in corporations being able to grow profits for the markets to move higher. To grow profits, corporations will need to either increase revenue or increase profits margins. The revenue part of the equation offers the most hope — given the strong labor numbers, companies could potentially raise their prices or sell more goods and services. However, there are potential obstacles with this route. One that materialized recently is the retail sales figures which showed seasonal adjusted strength in January but the December numbers, which were bad to begin with, were revised to show a decline of 2.3% for the month. Consumer spending accounts for 75% of GDP so this will be an important metric to watch moving forward.
Profit margins hit all-time highs in 2018 so it will be difficult to continue to increase margins this year. The primary goal of corporations will be to keep margins constant for 2019, which could be challenging with wage growth, as illustrated in the graph below, increasing above 3.0%. Labor costs are a large part of a company’s expenses and it is just in the past 12 months that we are starting to see them accelerate higher.
The two other controls companies have for managing profit margins are increasing productivity by leveraging technology and lowering cost through outsourcing. It is likely that companies will continue to pursue these options in 2019.
From a portfolio perspective, it is important for investors not to take on excess risk this late in the market cycle and to rebalance asset classes as markets move higher.