Market Strategy 4/8/2019
Life During Wartime
Key Takeaways
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With the S&P 500 perched near its record high from last September investors will closely track economic data, Fed minutes and the start of Q1 earnings season for justification of the recent run up.
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Recent news of positive developments in the trade negotiations between the US and China continues to rally equity markets worldwide in anticipation of a resolution to the trade dispute leaving markets vulnerable to any disappointment.
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Last week’s economic data continued to point to slow but sustainable economic growth ahead for the US.
As we begin this week near a new record high for the S&P 500 stock index we are not so much feeling Bob Dylan’s lyric of “Knocking on heaven’s door” but rather feeling closer to David Byrne’s classic late 20th century rocker “Life During Wartime”.
Thus far 2019 has seen a number of pronounced “about faces” from the market’s rise from “The Dark Side” in the last quarter of 2018 when the S&P shed just under 20% of its value from September 20th to a low on December 24th to coming just 1.3% from that September 20 high on this past Friday.
Improved communication by the Fed about its monetary policy, a rebound in the price of oil, signs of progress in talks between the US and China; along with economic data stateside relentlessly pointing to further expansion (albeit at a modest pace) rather than to a recession being around the corner in aggregate helped provide wind beneath the wings of the market to offset much of the negative sentiment, dire extrapolation and fearsome projection that took the market hostage in the last quarter of 2018.
That said we see the equity market’s current levels as providing not so much opportunity for investors to break out the party hats and celebrate the market’s nearness to a new record high but rather a time to consider the value of the discipline and patience that has rewarded investors who stayed the course during last quarter’s volatility.
It’s important to remember that the rally that began on December 24th that has taken the S&P 500 in one quarter and one week through last Friday just 1.3% shy of its record high posted last September 20th (and 2.33% from our 2019 price target of $2,960 which we initiated last December).
Even as earnings are not likely to shine as brightly this year as they did in year one of tax reform there’s opportunity for Q1 results to surprise positively when Q1 earnings season gets underway (as has occurred in prior quarters when analysts had taken a sharp blade to estimates ahead of the reporting season).
While the effects on corporations of the trade/tariff regimes implemented from the US and China have been widely reported a significant degree of resilience has been felt in economic data and corporate developments and guidance.
With job growth, unemployment levels (jobless claims at lows not seen since 1969) and wage growth and inflation not at levels worrisome to the Federal Reserve things may not be quite as good as some might desire but also are likely nowhere near as bad as some skeptics and bears might think.
Recent concerns about the sustainability of economic growth stateside and in the international realm in our opinion don’t take into account the boost that the US and global economy could get from a resolution to the trade fracas.
While we do feel that the equity market’s run-up from the last week in December (as well as from the start of the year) likely “prices in” much of the near-term economic improvement that could come from a trade agreement, we don’t think the move is completely priced in. For one thing too much worry remains around the market and economic landscape whether stemming from political or geopolitical factors or risks to corporate earnings.
Goldilocks has left the building
Even as the recent run-up in the equity markets signaled that valuations may have gotten ahead of themselves near term there appears (at least to some of us who have weathered other bull markets in previous cycles over the past three and a half decades) a dearth of irrational exuberance or animal spirits around the stock market. If anything we’d say there appears to be enough worry and concern around the market’s current value and recent trajectory to suggest a platform is being built for the equity market to move higher.
We expect that a “sooner than later resolution” to the trade war could take the S&P 500 and many of the global equity markets 3% to 6% higher near term before experiencing some type of consolidation on profit taking or some other catalyst.
Key to this bull market’s resilience from its start in March of 2009 through last Friday has been a mix of prudent Fed policy, an economic expansion based on improving (but rarely robust) fundamentals driven by a relentless secular elixir made up of disruptive advances in technology and globalization. We consider the latter two factors as “genies” that can’t be forced back into their bottles. Given this, we’d suggest more positive developments could lie ahead for equities, notwithstanding challenges along the way of course.
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