The two most glaring examples are 1994 and 2011.
We’ve written about these years before as examples of years where S&P 500 earnings growth was strong and yet the S&P 500 return for that calendar year was minimal.
1994 was the year Alan Greenspan surprised everybody with 6 fed funds rate hikes, starting in early February, 1994, but it was also a year where the Clinton’s Healthcare reform failed, and then later in 1994, the Mexican peso was devalued and Orange County defaulted thanks to leveraged bets on the short-end of the yield curve.
That year S&P 500 earnings grew 20% yet the S&P 500 returned 1% on the calendar year.
Don’t forget 2011 either, when the Greek and Euro debt crisis reared its ugly head and the S&P 500 corrected 20% from May to early October, 2011.
S&P 500 earnings grew 15% that year, led by Energy and Technology, while Financials and Housing were still digging out of the 2008 mess, and the S&P 500 finished about 2% higher.
In the mid-December blog post before the 2018 forecasts, it was noted that readers hadn't seen a year of “P.E. contraction” since 2011.
While the market has pretty much adjusted to 3 – 4 fed funds rate hikes this year, the move in the 10-Year Treasury yield already in the first 5 – 6 weeks of the year has been noticed. 2.40% to 2.84% is still manageable but over the 2013 highs of 3.00% – 3.03% and that will get people's attention.
Our forecast of an S&P 500 return of 7% – 12% this year means that the year will fall far short of expected earnings growth for the benchmark, with S&P 500 earnings growth of 18% expected.
We’ll see how the year unfolds. 1994 – with rising rates at the short and long end all year – saw the market trade like it was running a marathon with a piano on its back.
Kind of like the last two weeks.