Stocks extended their winning streak last week. As the Dow has risen four weeks in a row, the S&P has been higher six weeks in a row, and the Nasdaq has been up seven weeks in a row.
YTD, the Dow began the week up 20.1 percent, the S&P is up 24.5 percent, and the Nasdaq is up 28.7 percent. All occupy new all-time highs. And 2019 still has a month and a half remaining.
Many investors expect to see a powerful Santa Clause (year-end) rally. Especially given the strength of the economy and record low unemployment. Moreover, traders expect the U.S. and China to formalize and sign a phase one trade agreement within the next few weeks. And for the House to pass the USMCA deal by year end, after which it should quickly sail through the Senate.
All of which leaves 2019 looking like a truffle digger’s average day… Investors find themselves in a pretty good place. But they dug through a lot of shit to get there.
2019 marks an historic time for the economy and for markets. Both continue to set record after record. Some market observers believe that a “melt-up” is in play. Whereby stock trajectories go parabolic towards the end of a bull market in one last gasping, quantum leap higher. Consider 1999. A year in which the Nasdaq index rocketed 100 percent higher. Yet, even amid that big move higher, the index incurred five violent pullbacks of roughly 10 percent or more.
Even the most promising paths can be riddled with treachery.
At this point last year, equity indices were in free fall. Dropping rapidly in a year-ending pullback that ultimately saw the S&P 500 lose roughly 17 percent of its value.
A year later, investors feel markedly different. Stocks appear eager to move higher. And investors should not fight the tape. But they will do well to remember that trouble can appear when least expected. They cannot become complacent. They must maintain downside protection parameters. Gauge position sizes. And keep a scrutinous eye on the ever tenuous relationship between risk and reward. Especially as markets bask in the rarefied air of new record highs.
Economically, rail traffic continues to fall. Typically a harbinger of slowing growth. Yet, other tea leaves have strengthened, providing counter balance to the negative intermittent data point. Consumer confidence has moved higher. The housing market remains solid. The IMF said it expects 2020 to be better than 2019. While an economist from Macquarie summarized sentiment this way, “As 2019 draws to a close, the market is pricing in economic recovery, with equities in the U.S. hitting new highs and long yields well off the recent lows”.
Last Thursday, Federal Reserve chairman Jerome Powell told the House Budget Committee that there was “no reason to think… that the probability of a downturn is at all elevated.” Not every economic indicator is perfect, but wages are rising (especially on the lower end), unemployment remains at historic lows, and markets are booming.
If progress is being made on the trade front, and global economic growth is ascendant, then the outlook for investors could be improving at a time when everyone remains focused on the next recession. Providing an outcome that remains so improbable in context of the current discourse, that it may be much more likely than the current forecasts.
As Sherlock Holmes counseled, “When you have eliminated all which is impossible, then whatever remains, however improbable, must be the truth.”
Following last week’s missive on Chinese equities, we received feedback requesting further information as it becomes available. U.S.-Sino relations rank among the most pressing issues in global affairs, economics and everything in that sub-orbit. We will cover it accordingly. And appreciate the feedback.
China’s Defense Minister Wei Fenghe met with U.S. Defense Secretary Mark Esper in Thailand over the weekend. He warned the U.S. “to stop flexing muscles in the South China Sea.” Between that and recent positions on Hong Kong taken in the House and Senate, China and the U.S. are not about to kiss, make-up and strike a huge trade deal. The turbulence is tangible and will not be easily dispelled. Any “phase one” deal will represent a truce, not a long-term accord. That said, progress is afoot.
Constructive talks were held over the weekend. Reports have circulated that Trump may be willing to extend exemptions for Huawei. U.S. and Chinese law enforcement recently worked together to arrest Chinese nationals smuggling fentanyl into the U.S. While the U.S. Federal Thrift Retirement Investment Board (FRTIB) just confirmed that government employees’ savings can be invested in Chinese companies.
Evidencing the current momentum, Liu He, President Xi Jinping’s point person on trade negotiations, extended an invitation to U.S. trade representatives to hold another meeting in Beijing before next Thursday’s Thanksgiving holiday.
Concessions being made. Compromises being offered. A sense of urgency pervades. All good signs.
Of course, progress is motivated by the realities at hand. Official Chinese economic data has been concerning of late. Leaving us to ask how bad might be the real data. And domestically, Trump has next year’s election on the brain. Leaving both sides to act in their best interests. Still, regardless of the exigencies motivating the players, the fact that progress is being made is, in itself, progress.
Meanwhile, Hong Kong continues to devolve into ever more violent protests, followed by increasingly violent government responses. The situation has begun to resemble a civil war. One that remains disorganized and lacking clear objectives.
At some point, Chinese security forces will claim no alternatives beyond the forceful oppression of protesters. At that point, everyone will confront difficult decisions involving their levels of conviction and tolerance for violence. Short of a large international outcry against a Tienanmen Square-style crackdown, we see few windows of opportunity for protesters to achieve their ends without facing a violent backlash.
As JFK said, “The great revolution in the history of man, past, present and future, is the revolution of those determined to be free.”
Across the pond, European shares may be ascendant, as last week saw positive inflows for both active and passive European funds for the first time since February 2018. After a long time on the skids, European equities appear to be strengthening. We’ve had little European equity exposure for some time. But have begun to dabble at the edges. So far, we like what we see. The Vanguard Europe Index (VGK) is up nearly five percent the last three months. Why the S&P 500 has gained 2.46 percent. Eventually, European equities will grab the baton and solidly outperform U.S. indices.
In the quagmires of the Middle East, the U.S. announced it will no longer consider Israeli settlements to be illegal under international law. A move that formalizes the Trump administration’s treatment of the West Bank and shifts decades of U.S. policy. The policy drew praise from Israelis and condemnation from Palestinians, European officials and rights groups who said the stance could hinder peace efforts. Though one might ask which peace efforts, specifically, might be hindered.
Finally, let’s take a step back.
Recall a couple of months ago… we faced a torrent of stories cautioning us about an “imminent downturn.” Some pundits spoke of “self-fulfilling prophecies.” Others seemed giddy about the political prospects of a downturn. While some were simply begging potential viewers, “pay attention to me!”
Nobel Prize winning economist Paul Krugman has been a recidivist perpetuator of panic. Originally claiming that the 2016 election result would trigger “a global recession with no end in sight.” As late as April of this year Krugman was still telling crowds that the bond-market predicted “a pretty good chance of a recession sometime in the next year or so.” A narrative he continues to promote. Even as the facts increasingly contradict his reasoning.
Regardless, the message remains: in this hyper-politicized environment, it becomes all-the-more important for investors to practice detachment. To put logic, reason and truth ahead of fear mongering and emotion baiting. To keep an eye on their biases, and the impact they exert on decision making.
If investors can harness reason, truth and logic, allowing clear, unbiased thinking to light their way, they will more effectively meet their goals and aspirations. Creating better lives for themselves and their families. While avoiding the malodorous vapors emanating from the incessant infighting of those who call themselves leaders, but rarely enhance the stead of those they deign to lead.
Onwards and upwards!
Major indices finished mostly higher last week. The DJIA gained 1.17%. The S&P 500 rose 0.82%. The Nasdaq climbed 0.77%. While small cap stocks lost 0.16%. 10-year Treasury bond yields fell 11 basis points to 1.833%. Gold closed at $1,468.30, up $9.38 per ounce, or 0.64%.