As of 11/11/2019
- The United States and China agree to form a phase one trade deal.
- The Fed cuts interest rates for the third time this year.
- Key data show the market and economy remain on a firm footing.
- U.S. stocks look set to close 2019 with strong gains.
- A phase one trade deal could be signed as early as next month.
- The consumer remains strong heading into the important holiday shopping season.
Data Source: FactSet
A better-than-expected backdrop sends stocks higher
With U.S. equity prices breaking out to new all-time highs this month, and the Federal Reserve lowering interest rates for a third time at the end of October, bullish sentiment is again on the rise.
Throw in favorable seasonality tailwinds, easing trade tensions and better-than-expected third-quarter earnings reports, and some may argue we have entered a ‘Goldilocks’ environment for stocks. As long as fundamental and geopolitical conditions remain on their current course, we believe a ‘not too hot, not too cold’ market and economic environment is the ‘just-right’ recipe that could keep equity prices on solid ground through year-end.
From the Fed’s perspective, interest rate policy is accommodative and geared appropriately toward economic fundamentals. Moving forward, any changes to interest rate policy will be data-driven, which likely means a December rate cut is off the table for now. In our view, investors appear fine with the Fed hitting the pause button on future rate cuts considering current conditions.
Recently, the U.S. Bureau of Economic Analysis reported third quarter U.S. gross domestic product (GDP) grew at an annualized +1.9%.1 Although the pace of growth has slowed, we believe:
- The U.S. economy is in good shape and supports current stock prices.
- The consumer is healthy and continues to drive activity, which is positive for the market because of the consumer’s influence on overall growth. We expect a solid holiday shopping season.
- Households are confident, as evident in solid consumption trends and housing sector data.
- Business investment is a soft spot, but we believe the weaker spending is a result of slower activity abroad, trade tensions, and very specifically, temporary issues within the auto and aerospace industries.
On the earnings front, S&P 500® Index companies outperformed third-quarter expectations by a rather wide margin, which we believe is another factor driving stocks higher. With the earnings season nearly complete, 75% of S&P 500 companies beat their earnings-per-share estimates, while 60% outperformed revenue expectations, according to FactSet.2 Although overall earnings growth is trending negative for full-year 2019, the results so far are materially better than had been feared.
Easing trade frictions also lift investor confidence
Though fears of a near-term recession have subsided, and fundamentals point to a global economy in the early stages of turning a corner, we believe it’s the reduced threat in the U.S./China trade war that is principally driving asset prices higher.
The White House and Beijing are said to be close to signing a phase one trade deal, possibly as soon as December. The large themes behind a phase one deal include increased agricultural purchases and more significant commitments from China to curb abuses on currency manipulation and intellectual property rights.
Asset prices have responded more meaningfully to a delay in future tariffs as well as the possibility some existing tariffs could be rolled back over time. As long as an escalation of U.S./China trade tensions remains on hold, we believe equities could see positive tailwinds through year-end.
Closing the year on a high note
Unlike last year, stocks look set to cap this year with strong performance — that is, if market surprises are held to a minimum. Investors should feel good about current conditions. Interest rate policy is accommodative, earnings growth is outperforming expectations and the U.S. economy continues to stand on a solid base. Importantly, the consumer is healthy, stocks are close to posting well-above-average returns in 2019, and the U.S./China trade war appears in a holding pattern for now. In our view, these are all essential reasons to stay cautiously optimistic on the market through year-end.
Data source: Morningstar Direct, as of Nov. 11, 2019