Our Top Market Takeaways for the week ending November 15, 2019.

Markets in a minute

Inch by inch

Heading into Friday, the S&P 500 inched forward to notch another two record highs this week, bringing its tally to eight in the last 14 trading days and 21 so far in 2019 (which, in case you were curious, is above the average of 18 for a given year going back to 1980).

The chart shows the performance of cyclical stocks versus defensive stocks from January 2019 through November 14, 2019. It shows that, recently, cyclical stocks have been outperforming defensive stocks.

But while the last month has been filled with record highs, the moves have felt more like baby steps than leaps forward. In fact, it’s been over one month since the S&P 500 has had a 1% move in either direction, and all the record highs over the last month have only moved the needle on average by +0.3%. But while each step might feel small, they add up. The S&P 500 has gained +4.4% over that timeframe.

The Stoxx Europe 600 also fared well, hitting its highest level since 2015. But while the United States and Europe had a decent week, other global equity markets had a less stellar go. Hong Kong’s Hang Seng (-4.8%) and China’s onshore CSI 300 (-2.4%) both rounded out the week lower amid escalating political turmoil, and Japan’s TOPIX dipped -0.4%. Gold rallied, and bond yields moved lower. What’s behind the mixed week?

Here’s our tally of things that helped, and things that hurt this week:

~ We received our usual mix of good and bad news on trade. While China lifted a ban on U.S. poultry dating back to 2015, reports came that the United States and China hit a snag over agricultural purchases (which have been at the crux of the “phase one” deal).

- President Trump’s speech before the Economic Club of New York did little to satisfy investors seeking more clarity on the trade deal negotiations. He also ramped up pressure on the Fed to cut interest rates, potentially even to negative levels. Speaking of the Fed…

+ Federal Reserve Chairman Jay Powell testified before Congress and called the United States a “star economy,” with a “sustained expansion” likely in his view.

- Economic data out of China showed little bright spots. The country reported weaker than expected factory output and fixed asset investment grew at a record low pace. Surprise stimulus announced this week from the People’s Bank of China might help, but we think it’s more likely to be only moderately supportive.

+ While data in Asia was lackluster, Europe had a sunnier showing. Germany, which has been at the center of Europe’s economic growth worries, narrowly avoided a recession. The country’s third-quarter growth surprised to the upside, and growth for the broader Eurozone (which has been slowing as of late) came in line with expectations.

With headlines flipping every which way, it can be hard to keep track of where we stand. Read on for our take.

Spotlight

Taking Stock

Sentiment has swung rapidly over the last month. Where do we stand?

After eight new all-time highs in the S&P 500 this month, investors are feeling some type of way. Between October and November, investors recorded their largest increase in economic optimism on record. And how investors are buying and selling suggests they are putting their money where their mouths are. Investors sold positions in “safe” assets like cash, utilities and bonds to buy more “cyclical” assets like value stocks, banks and European equities.1

This rotation is evident in performance. Global stocks have outperformed long-term U.S. Treasury bonds (one of the “safest” assets) by about 5% so far this month. Cyclical sectors like Industrials, Materials, Financials and Energy are outperforming the broad market, while “safe havens” like Utilities and Real Estate have sold off. European equities are outperforming their U.S. counterparts (in local currency terms at least), the S&P 500 is hovering near all-time highs, and global stocks have finally surpassed their January 2018 peak.

The chart shows the S&P 500 Index level from January 2018 through November 14, 2019. It highlights previous record highs and shows that the S&P 500 Index is currently at an all-time high.

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There are a few reasons for this optimistic swing. First, the global manufacturing slide is starting to moderate. The JPMorgan Global Purchasing Managers Index, while still suggesting contraction, has turned higher. Second, there is still a high degree of optimism that China and the United States will come to a “phase one” agreement on trade, despite ongoing mixed headlines. While we have our doubts that this represents a step toward a broad and sustainable agreement, no escalation is unequivocally good news for stocks. Third, Senator Elizabeth Warren’s prediction market implied odds to win the Democratic nomination have fallen to below 30% from a peak of over 50% in October. We covered why investors are so nervous about Warren’s candidacy last week, but long story short: Lower chances of her platform becoming policy is good news for stock markets. For some time, the interest rate environment and economic fundamentals have warranted higher equity valuations, but recession fears, trade drama and election speculation have been working in the opposite direction. As investors got marginally good news on these three items, equities rallied.

Global growth will continue to chug along, inflation will likely remain benign, and interest rates should remain low.

So how long can this last?

This sentiment-driven environment can be a fickle one. Stock prices can be decomposed into two factors: earnings expectations and valuations (or how much value an investor places on a certain asset). Recently, valuations have changed with sentiment, but future earnings expectations really haven’t budged. Without the support from earnings growth, the market is left at the mercy of valuations and thus investor sentiment. We could see a continued rotation out of “safe havens” to more cyclically levered equity sectors like Industrials and Financials while the risks mentioned remain benign—but we are by no means in the clear on the three overarching issues. The growth slowdown does seem to be finding a bottom, and we don’t expect a recession soon…but we do not see a reacceleration either. The “phase one” trade deal would certainly be a positive, but it has not been signed yet and details are scarce. And we are still 354 days away from knowing who the President of the United States will be in 2021.

Ultimately, we have to trust our fundamental outlook: Global growth will continue to chug along, inflation will likely remain benign, and interest rates should remain low. For long-term investors, this suggests sticking with a modest overweight to equities, while tactical investors should take advantage when sentiment overshoots one way or another.

 

1 Source: Bank of America Merrill Lynch's November Global Fund Manager survey.

 

All market and economic data as of November 2019 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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