Continuing the march forward
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
Source: Manulife Investment Management, Bloomberg, as of December 31, 2020.
The earnings outlook is improving
As we look forward, we’re starting to see signs that the global economy may have bottomed and has shifted from contraction to recovery. Since the month of August, the U.S. ISM purchasing managers’ index (PMI) shows that manufacturing activity has increased materially on a month‑over‑month basis. Historically, the ISM PMI leads S&P 500 Index earnings growth by six months. We believe economic momentum will keep earnings growth strong on a YOY basis through 2021.
ISM PMI vs S&P 500 Index earnings growth YOY (advanced six months)
2000 – current
Source: Manulife Investment Management, Bloomberg, as of March 31, 2021.
Earnings growth is likely to ease any valuation pressure
Macro indicators would suggest 2021 will see a strong earnings growth environment that may include not only a recovery back to 2019 levels, but even stronger growth given the release of pent-up demand and excess personal savings. During periods when earnings growth is greater than 30% on a year-over-year basis (as we believe it will be in 2021), the average P/E contraction is 4.1 multiple points. When earnings growth is greater than 30% YOY, the average and median 12-month returns for the S&P 500 Index are 10.2% and 12.4% respectively.
Year-over-year change in S&P 500 Index earnings per share vs Change in trailing P/E multiple
1972 ‑ current
Source: Manulife Investment Management, Bloomberg, as of March 31, 2020.
Momentum begets momentum.
Equity markets often follow Newton’s First Law of Motion, “an object in motion, remains in motion”. Historically, when the S&P 500 Index is up over 20% in a six-month period, there is a 48.6% chance that it will be up more than 10% in the following six months. This is a 10% higher probability than the chance it will be up over 10% in any six-month period.
Historical Occurrence of Market EventsS&P 500 Index Following a Gain of > 20% Within 6-months
1927 ‑ 2020
Source: Manulife Investment Management and Bloomberg, as of December 31, 2020.
Manulife Investment Management’s sample strategy
• Favour a selective approach to Canadian equities.
• Consider diversifying business risks, not just sectors.
• 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.
• 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.