Unloved bull market: It's been a year since latest record

NEW YORK, N.Y. – Saturday is the one-year anniversary of the stock market’s record high. And no, you didn’t miss the party, because no one seems to be in the mood to celebrate.

The Standard & Poor’s 500 index reached its latest high of 2,130.82 exactly one year ago. Since then, it’s come close to beating it, only to veer lower, sometimes sharply. Last month it came within about 1 per cent of the record, but then more jitters about the economy and fears that the Federal Reserve could raise interest rates in June set in.

After a horrendous start to the year, the worst on record for the market, stocks have shown remarkable resilience and have clawed back the ground they lost since 2016 began. As of Friday, the S&P 500 was barely positive for 2016. It would need to gain another 4 per cent to match the high it reached a year ago.

More gains may be on the way, strategists along Wall Street say, though the forecasts are largely for only modest gains, and rocky ones at that. But even with the good news for 401(k) accounts, the excitement that pulsed during past peaks is lacking now from the market.

“There is no euphoria,” says John Manley, chief equity strategist at Wells Fargo Funds Management. “There isn’t even contentment.”

A big reason is how fresh the memory still remains of the stock market’s crash during the 2008 financial crisis. The S&P 500 lost 55 per cent from top to bottom from Oct. 9, 2007 through March 9, 2009, even after including dividends. That steep drop has led to a lasting skepticism about stocks, and the scars are affecting not only individual investors but also financial advisers whose job it is to counsel them, says Linda Duessel, senior equity strategist at Federated Investors.

“This is the most hated rally since it began,” she says. “If you’re an adviser, you’re afraid that if you get too bullish on stocks that you’ll lose your client if you get another downdraft.”

Such hesitancy is actually an encouraging sign to contrarians, particularly when few economists are predicting an imminent recession. But investors see many reasons to stay on the sidelines, and they’re showing it in several ways. Among the signs of and causes for concern that still envelop the market:

— Defensive stocks are leading the way. The best-performing areas of the market over the last year aren’t hot, high-growth stocks. They’re the old-line companies that traditionally do best when the market is struggling.

Utilities, telecoms and companies that make everyday items for consumers have had the strongest returns. These companies tend to have the most stable profits, and thus the most stable stock prices.

Part of it is likely a result of demographics. Baby Boomers are nearing or in retirement, and they’re looking for more stable investments that also produce income. That’s a good description for defensive stocks: Utilities in the S&P 500 have a dividend yield of 3.7 per cent, for example, well above the 1.85 per cent yield for a 10-year Treasury.

The strong run means dividend-paying defensive stocks are more expensive, relative to their earnings. But they should continue to attract buyers because they still look better than many alternatives, such as low-yielding Treasurys, says Federated’s Duessel.

— Investors are more fearful than greedy. Nearly $18 billion left U.S. stock mutual funds and exchange-traded funds during the first quarter, according to Morningstar. Much of that was because of the scary 5 per cent loss for the S&P 500 in January, and it fits with the longstanding hesitancy investors have had about the U.S. stock market.

Over the 12 months through March, investors pulled a net $69 billion from U.S. stock funds. And it’s not like investors have been fleeing all types of investments. They put $163 billion into foreign stock funds and $7.5 billion into taxable bond funds over that same time.

— The global economy is scuffling. Even though central banks around the world have piled on unprecedented amounts of stimulus, growth around the world remains weak.

The U.S. economy appears to be in the best shape, relatively speaking, as job growth continues. But it expanded at just a 0.5 per cent annualized rate last quarter, its weakest pace in two years.

Other economies around the world look to be in worse shape, highlighted by Europe and Japan. The International Monetary Fund recently cut its forecast for global growth this year and warned that global financial stability risks have increased.

— Corporate earnings are sinking. Stock prices generally follow corporate profits over the long term, and the recent trend has been downward.

Most companies have given their report cards for how they fared from January through March, and S&P 500 earnings per share look to be 5.8 per cent lower than a year ago, according to S&P Global Market Intelligence. That would be the worst performance since the spring of 2009, when the economy was in the last throes of recession.

It would also be the third straight quarter where earnings have dropped. Much of the weakness has come from the energy sector, where falling oil prices have decimated profits, but other sectors are also seeing weakness. S&P 500 earnings fell 1.1 per cent last quarter, even after excluding energy companies.

Forecasts are for this reporting season to mark the bottom. Analysts expect to see more modest declines and even slight growth as the year progresses.

“On the whole, I think it will get better,” Wells Fargo’s Manley says about his expectations for both corporate earnings and the stock market. But “I’m looking over my shoulder like everyone else until earnings get better.”