The market can continue to grind higher into year-end, says Voya's Barbara Reinhard

Key Concepts

• Market Cycle: The cyclical nature of market performance, characterized by phases of expansion, peak, contraction, and trough.
• Lead Indicator: A metric used to predict future economic or market trends.
• Frothy Market: A market characterized by excessive optimism and inflated asset prices, often preceding a correction.
• Investor Excessiveness/Speculation: High levels of risky investment behavior driven by greed or herd mentality, often seen at market peaks.
• Earnings Growth: The increase in a company's or market's profits over time, a key driver of stock prices.
• Labor Market Weakness: Signs of a deteriorating job market, such as rising unemployment claims.
• ADP Data: Data released by Automatic Data Processing, Inc., providing insights into private sector employment.
• All-Time Highs: The highest price an asset has ever reached.
• Pullback: A temporary decline in asset prices.
• Fed Tightening: Actions taken by the Federal Reserve to reduce the money supply and slow down the economy, typically by raising interest rates.
• Exogenous Shock: An unexpected external event that significantly impacts the economy or market.
• S&P 500: A stock market index representing the performance of 500 of the largest publicly traded companies in the United States.
• Equal-Weighted Index: An index where all constituent stocks have the same weight, regardless of their market capitalization.
• EPS Growth: Earnings Per Share growth, a measure of a company's profitability on a per-share basis.
• Emerging Markets: Countries with developing economies that are experiencing rapid growth.
• Healthcare Sector: A segment of the stock market focused on companies involved in healthcare services, pharmaceuticals, and medical devices.
• Put/Call Volume: Trading activity in options contracts, where put options give the holder the right to sell an asset at a specified price, and call options give the right to buy. High put volume can indicate bearish sentiment, while high call volume can indicate bullish sentiment.
• Investor Sentiment Surveys: Questionnaires designed to gauge the overall mood and expectations of investors.
• Retail Buying: Investment activity by individual, non-professional investors.
• Foreign Investor Flows: The movement of capital into or out of a country by investors from other nations.
• Tick Data: High-frequency trading data that records every price change for a security.
• Tech Bubble (Late 1990s/Early 2000s): A period of rapid growth and subsequent collapse in technology stock valuations, driven by speculation on companies with unproven business models.
• Capital Spending Boom: A period of significant investment by companies in new equipment, infrastructure, and technology.
• Hyperscalers: Large-scale cloud computing providers.

Market Outlook and Current Conditions

Barbara Reinhardt, Chief Investment Officer of Multi-Asset Strategies and Solutions at Voya Investment Management, discusses the current market environment, suggesting that a recent correction may be over and that the market could continue to "grind higher" into the end of the year.

• Market Sentiment: Reinhardt notes that the market had felt "frothy" recently, with their lead indicator rolling over from "optimistic" to "neutral." However, she does not observe significant signs of speculation or investor excessiveness.
• Economic Data: Recent labor market data, including jobless claims and ADP data, appears to have alleviated concerns about weakness in this sector.
• Recent Pullback: While the Nasdaq experienced a 3% decline last week, it remains only slightly over 4% from its all-time highs. Other major averages are down less than 4% or 3% from their peaks. Reinhardt characterizes these pullbacks as minor, stating that a less than 5% decline is "hard to describe as anything to write home about." She also points out that there hasn't been a 2.5% pullback since April, which was associated with a larger 20% peak-to-trough decline.
• Drivers of Market Downturns: Reinhardt identifies two primary catalysts for significant market declines (10-15% or more):
  1. Fed Tightening: Aggressive monetary policy tightening by the Federal Reserve is a historical precursor to major market tops and bear markets.
  2. Exogenous Shocks: Unexpected external events, such as the tariff shock experienced in April of this year, can also trigger sharp market downturns.

Earnings and Valuations

• Strong Earnings Growth: Reinhardt emphasizes that earnings have been "great," providing a strong underlying support for the market.
• Valuation Metrics: While the S&P 500 is considered expensive at 23 times earnings, the equal-weighted index trades at a more modest 17 times earnings. This difference helps to keep the broader market in check.
• Fed Policy: The current environment of Fed easing is generally conducive to positive equity market returns, with potential for high single-digit to double-digit returns over a 12-month horizon.

Investment Strategies and Diversification

For investors concerned about potential market wobbles or seeking alternatives to the S&P 500, Reinhardt suggests several avenues:

• Emerging Markets: These markets are currently viewed as "relatively good."
• Healthcare Sector: After lagging for the entire year, the healthcare sector appears to be "finding its footing."
• Diversification: Reinhardt advises that there are "plenty to do in the markets than just necessarily be worried about the next 5% correction."

Assessing Speculative Activity

Reinhardt outlines methods for judging speculative activity in the markets:

• Put/Call Volume: Analyzing the ratio of put to call options trading.
• Investor Sentiment Surveys: Monitoring a portfolio of 10-15 daily sentiment surveys.
• Retail Buying and Foreign Flows: Observing trends in retail investor participation and foreign investment. Currently, the US continues to attract foreign investment, which is seen as a sign against widespread speculation.
• Comparison to the Tech Bubble: Reinhardt contrasts the current market with the late 1990s tech bubble, where companies with strong concepts but no earnings saw significant price appreciation. Today, she argues, this is not the case.

Market Cycle Positioning

• Capital Spending: Reinhardt draws a parallel to the 1990s cycle, noting that while there was a 10-year capital spending boom then, the current cycle has only seen three years of such spending, particularly in the hyperscaler space.
• Current Stage: She estimates that the market is currently positioned somewhere around "1997, 1998" in the context of the 1990s cycle, suggesting there is still room for growth.

Conclusion

Barbara Reinhardt's analysis suggests a cautiously optimistic outlook for the market. While acknowledging recent minor pullbacks and the potential for continued "wobbles," she believes the underlying strength, driven by robust earnings growth and a supportive Fed policy, is significant. She advises against excessive worry over small corrections and points to diversification opportunities in emerging markets and the healthcare sector. Her assessment of speculative activity indicates that the market is not currently exhibiting the excesses seen during past bubbles, and she believes there is still upside potential based on historical market cycle comparisons.