Market Direction: BULLISH alert issued 10/24/2019
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Market Direction Week Review: Stocks
rose in the final week of 2019, with several major indexes hitting fresh record
highs. Volatility remained subdued, and stocks continued their ascent into
year-end, as there were no catalysts or major economic releases to disrupt the
market rally. The S&P 500 is on track to match the 2013 29.6% return, which
was the best of this decade. Historically, stocks have risen by an average of
7.0% the following year when the stock market rose by more than 25%, indicating
that good returns don't have to be followed by bad ones1. However,
given full valuations, we think investors need to incorporate lower expected
long-term rates of return into their strategies.
Source: Bloomberg, S&P 500 price returns
Source: Bloomberg, S&P 500 price returns
2019 in Review: The Fed, Trade and the End of a Strong Decade
Investment
goals and market cycles do not reset every calendar year, but the end of a year
marks an opportunity for reflection. The one thing that most investors agree on
is that there is never a dull moment when it comes to investing and financial
markets. That proved to be the case in 2019 as stocks managed to climb the wall
of worry, finishing the year and the decade on a high note. While a mosaic of
events and factors typically drive the market narrative and short-term
performance, two stand out this year: 1) the Federal Reserve pivot, and 2)
twists and turns on the U.S. / China trade negotiations. Before digging deeper
into these two factors, here is a look back at the highlights (good and bad) of
2019 and what they could mean for the markets in the year ahead.
- A year with plenty of records, firsts and low points
- 34 new record highs
- 126 months of economic expansion
- Unemployment at a 50-year low
- Zero 10% corrections
- Slowest global growth in 10 years
- Record low 30-year government yields
- $11 trillion of negative-yielding debt
- Yield-curve scare
- Asset-class scorecard
How
the market finished last week, the S&P 500 up 0.6%, the Nasdaq up 0.9%, and
the Dow up 0.7%.
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Market Direction This Week: We track the stock market based on our Bullish and Bearish Alerts a new Bullish Alert recently started on 9/5/19 and we suggested to our followers they can trade any new long positions based on are model. We will continue to provide you the current stock market conditions as they develop. The current stock market environment is in an uptrend (see Market Direction Mid Week Update: Trading Strategies).
·
Implications for 2020:
1) We believe economic data will be more
balanced and stock-market gains will moderate as we progress through next year
and decade. Valuations are higher exiting 2019 compared with year-ago levels,
yet they are still at reasonable levels given the economic and interest rate
backdrop. With limited opportunities for further multiple expansion, the pace
of market gains will be set by the pace of earnings growth, which we think will
rise at a mid-single-digit rate. 2) We expect consumer spending to remain a
bright spot in the U.S. economy. Job growth will likely slow but stay above the
100,000-level necessary to absorb new entrants in the labor force. 3) Election
uncertainties, trade setbacks and occasionally underwhelming economic reports
will likely stoke higher volatility than investors have been accustomed to in
recent years. 4) While U.S. large-cap stocks have consistently generated the
best returns this decade, asset-class leadership often rotates. As the cycle
advances, we think well-diversified portfolios will be better positioned to
navigate the swings. 5) Despite ongoing low yields, we still think fixed-income
investments play an important part in helping stabilize portfolios when stocks
drop.
· A U-turn by central banks:
The biggest change in the macroeconomic landscape in 2019 was, in our view, the dovish pivot of major central banks around the world. The Fed, the European Central Bank (ECB) and the Bank of Japan all became more accommodative to sustain the economic expansion. This synchronized policy easing was a key driver of financial markets, contributing to the fall in short- and long-term interest rates, and benefiting equities. One year ago, the sell-off in 2018 was driven by concerns that the Fed was overtightening amid escalation in trade tensions and slowing global growth. Since then, rather than continue to tighten policy as originally planned, the Fed pivoted to a pause in March and later cut rates three times as insurance against risks to the outlook.
- Implications for 2020: Easy financial conditions will likely continue to support stock prices next year. Monetary-policy changes impact the real economy with a lag (typically six – nine months); therefore, we expect the markets and the economy to continue to benefit in 2020 from this year's rate cuts. Risks of a further slowdown in global growth have lessened somewhat in recent months, but inflation remains stubbornly below target, providing the Fed flexibility to remain accommodative.
· Tweets, tariffs and a truce
Trade tensions triggered the two most sizable pullbacks in global stocks this year. Accompanied by a series of tweets in May, President Trump raised tariffs to 25% from 10% on $200 billion in imports from China. China responded by increasing tariffs on $60 billion worth of U.S. exports. In another episode of the trade saga in August, the U.S. announced 10% tariffs on an additional $300 billion worth of Chinese imports. China responded with $75 billion in new tariffs. The direct impact of the trade escalation was a drop (but not a collapse) in global trade volumes. The indirect impact, which potentially carries more economic significance, in our view, was the deterioration in business confidence and investment hesitation because of the uncertainty. The emergence of the "phase one" trade deal between the U.S. and China, which includes agricultural purchases and some tariff relief, eased fears of further trade escalation and inspired the market's late-year rally.
- Implications for 2020: We believe that the recent trade truce signals that both countries are incentivized to compromise to avoid more economic harm. The "phase-one" agreement could help ease uncertainty, if it lasts, and act as a catalyst for a modest rebound in global manufacturing activity. However, we would caution that there could be further setbacks that stoke market volatility. A comprehensive deal including the more-sensitive issues of intellectual property rights protection and enforcement will likely not happen before the 2020 U.S. elections.
· A final note
With days left in 2019 and this decade, we reflect on what has been an eventful and prosperous year. Heading into 2020, we maintain a fairly positive outlook, but we believe that the next decade will likely bring plenty more challenges for investors to navigate.
Some of the major earnings announcements on deck: No earnings this week.
$tockMarketDirection proprietary model is currently BULLISH. We strongly encourage you to monitor positions closely, exercise proper money management strategies and follow us at $tockMarketDirection for ALERTS we may issue advising a change in the current market direction. Stay tuned and follow us. If you have a testimonial or comment of how this website has helped you we would like to know, email us. Building a community of investors one trade at a time. Share with a friend. Cha-ching!
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