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US equities

Continuing the march forward

This table features text accompanying heat diagrams for U.S. Equities. The heat diagrams, gauging Manulife Investments' outlook from Bullish to Bearish, indicate a stronger than neutral view on both, along with detailed rationales for each position.

Corrections are normal.

Stock market corrections are very common and very difficult to predict. Since 1980, the S&P 500 index has fallen an average of 14.3% in any given calendar year but is positive 78% of the time with an average return of 10.3%

S&P 500—Calendar Year and Max Intra Year Returns

1980 – current

This bar chart shows calendar year returns for the S&P 500 from 1980 to 2020. It also shows the maximum drawdown in each calendar year.

Source: Manulife Investment Management, Bloomberg, as of December 31, 2020.

Lack of volatility is not normal.

It was not until the last day of the quarter that the S&P 500 had its first 5% pullback from its most recent peak. It is a rare occurrence to not have a minimum 5% pullback during a calendar year as there is an average of at least two such pullbacks per calendar year.

S&P 500 Price Index drawdowns greater than 5%


This chart illustrates that earnings growth in the US has historically had a strong correlation to the ISM Purchasing Managers Index with a 6-month lag. The data starts at 2000 and ends at March 31, 2021. At current level of 64.7, the PMI would imply strong earnings growth in 2021.

Source: Manulife Investment Management, Bloomberg. As of September 30, 2021

Pullbacks provide opportunities.

Outside of recessions, history would suggest that when the market falls more than 5% from its 52-week high, that the 1-year forward return will be positive. Investors should take advantages of pullbacks when they present themselves during non-recessionary periods.

S&P 500 Price Index 1-year forward returns after selloffs from 52-week peak

(1990 - current)

This chart shows year over year earnings growth compared to the year over year change in Price to earnings ratio of the S&P 500 from January 1972 to March 31, 2021. These two data sets have an inverse correlation so they move in opposite directions to the upside and downside over time. The axis for the change in price earnings ratio is inverted so the image shows how closely they follow each other. Recently the price to earnings ratio is quite high but since the axis is invers the line is low. The earnings growth line is also low.

Source: Manulife Investment Management, Bloomberg, as of September 30, 2021

Earnings are likely to drive returns.

The U.S. ISM purchasing managers’ index (PMI) shows that the momentum in manufacturing activity is still in place on a month-over-month basis. Historically, the ISM PMI leads S&P 500 Index earnings growth by six months. We believe that the manufacturing activity will keep earnings growth strong on a YOY basis into 2022.

ISM Manufacturing PMI vs. S&P 500 Index Earnings Growth YoY (advanced 6 months)

2000 - Current

This bar chart shows the frequency returns greater than 20% within a 6 month period is 16.4%. Then is shows that the chance of a return of a drop of greater than 10% following a gain of 20% is 25.%, which is essentially the same chance of a drop of greater than 10% in any 6-month period. It then shows that the chance of a gain greater than 10% followinga gain of 20% within six months is 48.6%, which is much greater than the probability of a gain of 10% or more in any 6-month period which is only 38.2%.

Source: Manulife Investment Management, Bloomberg, as of September 30, 2021

Manulife Investment Management’s sample strategy

This proportional bar chart shows a rough breakdown, in percentage terms, of a sample portfolio of Canadian, U.S. and international equities and fixed income, including a brief outlook discussion for each asset class.

Canadian equities

• Favour a selective approach to Canadian equities.

• Consider diversifying business risks, not just sectors.

US Equities

• Look for opportunities to take advantage of market dislocations.

• Consider dollar‑cost averaging into equities.

International developed market equities

• Consider less constrained strategies that can seek out opportunities wherever they may present themselves.

Emerging Market equities

Opportunities may exist within the emerging markets, specifically in the Asia ex‑Japan region.

Fixed Income
• Favour flexible strategies that can seize opportunities wherever they may be.

•Consider using different types of bonds for different objectives, whether it is downside protection or enhanced yield.

•Be mindful of the potential currency impact on global allocations.

Source: Manulife Investment Management as of December 31, 2020. For illustration purposes only. Performance histories are not indicative of future returns. The information in this document does not replace or supersede KYC (know your client) suitability, needs analysis or any other regulatory requirements. Clients should seek the advice of professionals before making any investment decisions.