Market Strategy 11/18/2019
Don't Bring Me Down
Even as trade war uncertainty hovers over markets investors find reason to bid stocks higher
Key Takeaways
- As stock indexes hit further record highs last week we stress the importance of keeping this year’s gains in context of last year’s fourth quarter decline.
- Recent gains in the equity markets suggest to us not “animal spirits” or “irrational exuberance” but rather the market’s belief in the potential for a trade war resolution and a bottoming of a period of economic slowing and sluggish earnings growth.
- Last week’s economic data point to low inflation and the sustainability of the current economic expansion.
Stocks stateside closed higher for a sixth week straight last Friday even as news from the trade front suggested the “devil remained in the details” of the ongoing negotiations as the December 15th deadline for a new round of tariff hikes hovers over markets worldwide.
Last week’s upside in equities countered worries expressed by some investors who suggested the presence of the proverbial whiff of animal spirits or irrational exuberance had something to do with the market’s recent advance.
In our view the market’s recent run up signals a mixed bag of factors are at work beyond just hopes for a trade resolution, including: some capitulation by investors who have stayed on the sidelines for too long (waiting for interest rates to rise meaningfully and stick at higher levels); a spate of window dressing activity by some underperforming money managers as the calendar closes in on 2019; and a thought that so much green on the equity screen world-wide could be suggesting that the economic and earnings slowdown may have run its course and might just be bottoming out.
We can’t help but think that the proverbial “short-term memory” of at least some skeptics and bears who regularly fret whenever stocks touch new record highs has been jarred by the reality that for all the double-digit gains posted year-to-date by equity benchmarks (not just stateside but around the world) the underlying gains are a more moderate and often single digit type when placed in context of the peak levels seen in September 2018 before the drubbing that stocks got in the fourth quarter of that year. In such context 2019 remains in our view much as we’d expected it to be—more of a “do-over, make-up” year than a “banner” year in terms of equity performance. Taken in such context further gains could lie ahead if not just around the corner.
Beyond any expectations of what might come from a signed “phase one” trade deal between the U.S. and China, the current rally among equities stateside and in several markets around the world might well be investors acknowledging that indeed “things” (such as economic and corporate fundamentals) simply aren’t as bad as many bears and skeptics say they are.
In our view economic data and corporate results have shown remarkable resilience midst a trade conflict that is now deep into its second year (see economic data and our Q3 earnings season scorecard on pages 4 and 5 of this report for illustration and commentary).
Unemployment remains at near record low levels even as wages rise modestly. Major commodity indices such as the Russell Jefferies CRB index remain far below precrisis lofty levels (see page 3 for the chart). Inflation remains moderate and has so far been kept in check by secular trends linked to technology and globalization as well as monetary policy that so far persists in being sensitive to both strengths as well as vulnerabilities in the economy.
In the week ahead investors will focus on the release of the Fed’s October FOMC minutes (mid-week) parsing the words and any changes in word placement for hints as to what the Fed might or might not do next. With just 8% of the S&P 500’s member companies left to report, a number of widely held and widely followed companies (within consumer discretionary, healthcare, industrials, information technology and staples) will come under the market’s scrutiny as Q3 earnings season draws nearer a close.
With the aforementioned along with a smattering of economic data crossing the transom over the course of this week, look for increased attention on any tidbits and scraps of news from the negotiations table labored over by the US and China.
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