- Business Insider recently reached out to dozens of experts and asked them to provide the single chart they think explains the most important trend in markets right now.
- All of the chief equity strategists surveyed provided us not only with a trend, but actionable advice that investors can use.
The stock market is crawling back to its old highs in unspectacular fashion. Beneath the surface, however, it's anything but boring.
We recently reached out to dozens of market experts and asked them what they consider the most important chart in the world. Their submissions detailed why each chart is significant, and what its contents mean for investors going forward.
Virtually all the chief equity strategists we reached out to provided us with more than a trend. They also offered actionable insight into ongoing market opportunities, and ways that investors can do their jobs better.
Listed below are the experts and what they said:
1. Dubravko Lakos-Bujas, chief US equity strategist and global head of quantitative research, JPMorgan
The biggest weight on the stock market late last year was the US-China trade war, Lakos-Bujas said.
Investors were not alone in reflecting those concerns. Lakos-Bujas' study of corporate earnings calls shows that no concerns were more frequently mentioned than tariffs and regulation.
Yutong Yuan/Business Insider
And so, it follows that progress on this issue would be bullish for the stock market.
"With [the] Fed turning more dovish and constructive, US-China trade discussion is center-stage and should be watched carefully," Lakos-Bujas said. "A satisfactory resolution of the issue would have positive consequences for global growth and may prolong the current business cycle."
2. Chris Harvey, head of equity strategy, Wells Fargo
Count Harvey among the cohort of strategists who are heralding the return of value investors.
Such stock pickers pride themselves in fishing out companies they consider the most undervalued, based on metrics like the price-earnings ratio (P/E). But they've endured a tough spell as high-growth companies outperformed.
"After two years of underperformance and a healthy sell-off in 4Q18, we think the risk/reward for the value style is much more attractive," Harvey said. "The pendulum is swinging back in Value's favor - we're expecting a positive run for the investment style over the next 12 months."
His conviction in value investing is driven by the chart below, which shows that the spread between "cheap" and "expensive" stocks swelled last year to levels dating back to 2011. Year-to-date, however, the spread is shrinking, and that potentially brings the value investing style back into favor.
Shayanne Gal/Business Insider
Shaded areas highlight the re-pricing of multiples and when Value came back into favor.
3. Keith Parker, head of US equity strategy, UBS
Any basic chart of the S&P 500 since its inception sends one clear message: stocks don't always go up, but they rise on a long-enough time horizon.
Parker illustrated that same point in even more detail by showing how stocks perform in the years after their P/E ratios suffered big declines. 2018 turned out to be one such painful year, and the potential implication for equity returns this year is bullish.
Samantha Lee/Business Insider
"We find that in years following a decline in the P/E of more than 1x, the S&P 500 has returned an average and median of 16% with only two instances of negative returns (2000-01, 1973-74)," Parker said.
He continued: "There has been a higher percentage of years with 0-5% returns, which have happened 20% of the time. History would suggest that the balance of risks is still to the upside."
4. Lori Calvasina, head of US equity strategy, RBC Capital Markets
Calvasina also handpicked the S&P 500 P/E as the most important trend to watch, but from the perspective of how Federal Reserve policies have impacted it on a trailing basis.
Her chart below shows that stocks largely benefitted during the "easy money," post-crisis era, when the Fed juiced markets with liquidity by buying up trillions of dollars worth of bonds.
That era has been fading away since 2017, when the Fed started the process of shrinking its massive balance sheet - a process known as quantitative tightening. Right on cue, trailing earnings per share began to wane.
"Even if this is just a coincidence, ending the balance sheet unwind would give US equity investors one less thing to worry about," Calvasina said.
In Congressional testimony this week, Fed Chair Jerome Powell said the central bank is prepared to make adjustments if necessary. And that's exactly the kind of thing investors want to hear.
Shayanne Gal/Business Insider
5. Brian Belski, chief investment strategist, BMO Capital Markets
Heading into first-quarter earnings season, it came to no one's surprise that analysts were cutting their expectations.
It's their custom to temper their forecasts, only to raise them as companies start to outperform. For the first quarter specifically, they also had to contend with signs of a slowing economy and the fading impact of tax reform compared to last year.
Belski's takeaway from this trend was bullish relative to other analysts. He created an index of earnings revisions by measuring the number of analysts increasing their estimates relative to the number of total revisions over the prior 60 days. The left chart below confirms that the so-called revision ratio plunged late last year.
However, Belski's work also showed that in all the years after such a plunge in expectations since 1990, the S&P 500 outperforms by an average of 10.5% and a median of 9.8%.
"Significant losses have been quite rare," he said.
He continued: "In fact, all of the double-digit losses throughout this period occurred during 2002, which was characterized by uncertainty still surrounding the continued Tech bubble unwind, as well as the 9/11 aftermath."
BI Graphics
6. Binky Chadha, chief US equity & global strategist / head of asset allocation, Deutsche Bank
There's sometimes a seemingly strange rally when companies announce massive layoffs.
At first blush, it appears that investors are cheering the loss of livelihood for thousands of workers. However, what they're actually doing is pricing in their expectation for higher profit margins, given that one major cost - labor - has been trimmed.
But the relationship between wages and profit margins is not always cut and dry, according to Chadha.
He illustrates in the chart below that there have been several instances when S&P 500 profit margins have risen alongside growth in average hourly earnings. Such periods include the late 1980s, the early 1990s and early 2000s.
One caveat to Chadha's observation is that it compares two broad, aggregated metrics, and so there are bound to be company-specific exceptions.
A starting point to find those exceptions is in Goldman Sachs' basket of companies with implied labor costs of either 0% or 1% of revenue.
Shayanne Gal/Business Insider; Compustat, Haver.
Correction: Sources are Compustat, Haver.
Skye Gould, Samantha Lee, Shayanne Gal, and Yutong Yuan contributed to this feature.