Consumer Sentiment High, President Approval Low – Good for Markets

The stock market had a bullish week driven by accelerating economic activity. Cyber Monday sales were up 16.8% from last year. Traditional retailers like Macy’s (M) reported improving trends. In the past three weeks, M has appreciated by 36%. The Leading Economic Index (LEI) jumped up 1.2% in October from the prior month which was revised up from -0.2% to +0.1% (see Dashboard below).  Personal income and employment reports were better than expected. GDP growth in the third quarter was revised higher to 3.3%. 3%+ is substantially better than the 1-2% GDP growth rates that have been the hallmark of the current expansion.

Despite improving fundamental economic numbers, a rising stock market and cycle high consumer confidence, investors are far from euphoric. Since 2009, $763 billion has come out of equity funds and ETFs while $1.5 trillion has gone into bonds. 

Tumultuous political headlines may be one reason investors have remained skeptical. President Trump’s most recent weekly average approval rating is 37%. His presidential term average to date is 38%.

Over the past 55 years, the markets have performed best when the president’s approval rating polled somewhere between 35%-50%.

In our 2018 Stock Market Outlook published November 17, we forecast 11% growth for the S&P 500. The 11% projection is based on the consensus S&P 500 earnings growth forecast of about 11% and a constant price/earnings multiple. It is also supported by the approval ratings of the President.

Funds follow performance. As the stock market moves higher, it is likely to attract new money. Eventually, too much money will drive stock returns down and potentially from positive to negative.

As the famous boxer Joe Louis once said “Everyone has a plan until they get hit.” Investors may chase returns near the top of a market cycle as greed controls their sentiments.

Although we are currently bullish and have a bullish outlook for 2018, we first establish the rules by which we will sell before we invest. As a firm, we are dedicated to using rules-based controls to manage stock market exposure. We seek to participate in bullish markets and avoid major bearish markets. Having an established sell discipline allows us to ride the bull this week, this year and hopefully much if not all of next year with peace of mind.

Over a fifth of the S&P 500 is represented by the technology sector. Consensus revenue growth for the technology sector in 2018 is 9.4% which should drive 35% earnings growth. In the past month, the revenue growth forecast was revised up from 8.7% to the current 9.4%.

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US Capital Wealth Management Stock Market Dashboard

Delta Market Sentiment Indicator (MSI) is published weekly in Barron’s