Stocks: Lessons From 1994

Consumer Spending Hits Soft Patch

Economic data, like the stock market, has been erratic in recent months. The “good data followed by weak data” pattern still seems to be in place. The U.S. economy recently posted the best quarterly results since 2006, but the latest read on consumer spending kept expectations in check by coming in below expectations. From Bloomberg:

“Consumer spending is looking soft here, some of it was the weather effect,” Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York, the top spending forecaster over the past two years, according to data compiled by Bloomberg. Consumption “will come back in the second quarter.”

Sideways Markets - The Bad News

Markets that trade within a range, or consolidate, are a reflection of a fairly even battle between economic bulls and economic bears. The tweet below from last week provides a familiar reference point for the stock market’s current run of consolidation.

Sideways markets are difficult and frustrating for stock investors; that is the bad news. The chart below shows a period in 1994 and 1995 when the S&P 500 made little-to-no progress for 12 months.

Sideways Markets - The Good News

The good news is the longer the period of uncertainty lasts, the higher the probability that a big move will follow. In the 1995 case, the big move was up. Investors that stuck to their discipline during the 12 months of frustration above were rewarded with a very impressive gain in the S&P 500 (see chart below).

Investment Implications - The Weight Of The Evidence

If you have a systematic approach to the markets, as we do with our market model, the importance of sticking to your discipline during frustrating periods cannot be overstated. This week’s stock market video acknowledges vulnerable momentum, but also highlights some key risk ratios that continue to side with the “keep an open mind about stock market upside” case.

As long as the S&P 500 can hold above 2,039, we will continue to be patient with a still-equity-heavy allocation. With a monthly labor report coming Friday, we will continue to monitor the hard data with a flexible and open mind.