Investor cheer may extend beyond the holidays
With the S&P 500 nearing our 3,100 year-end target, Federated’s equity team believes 3,300 is possible by mid-2020 and 3,500 by the end of next year, aided by factors helping to drive the current rally:
- Trade optimism The U.S. and China appear near to completing their “Phase 1” pact that would include Chinese purchases of American agricultural goods, better access for certain U.S. industries in China, and perhaps some new rules regarding currency manipulation and intellectual property. Reports overnight suggest that in addition to canceling tariffs set to hit Dec. 15, the deal may roll back existing tariffs imposed in September. If struck, this détente would be both a short- and long-term positive, even if this is as far as talks go.
- A Fed on hold After delivering their third quarter-point cut of the year, Chair Powell and company made clear last week that they are firmly in pause mode. Their actions have caused our preferred yield-curve measure, the 10-year Treasury vs. the target fed funds rate, to steepen more than 80 basis points from its September low, reinforcing favorable liquidity conditions and creating a nice tailwind for stocks heading into the New Year.
- A healthy—and happy—consumer October’s surprisingly strong jobs report—with prior month’s revisions, nonfarm payrolls jumped 223,000 (and that’s excluding an additional 42,000 jobs from striking GM workers who are back on the job)—suggests consumers can continue to hum along, providing a strong foundation for the economy even as manufacturing confronts challenges. At 70% of GDP, consumer spending is the grease that keeps the economy moving.
- Fading “earnings recession” fears Consensus for the Q3 reporting season is proving to have been overly bearish: 70% of companies are beating expectations by an average of 4.7%, putting earnings-per-share growth on pace to top 1% year-over-year (y/y) vs. forecasts of a 2-3% y/y decline. Cyclical sectors including financials, industrials and parts of consumer discretionary have been particularly strong, boosting value cyclicals relative to growth—a trend that we expect will continue going forward.
- Better global outlook A hard Brexit now appears unlikely; China is signaling a desire for greater global cooperation on trade (not just with the U.S.); and reports indicate the European Union and the U.S. may be working out their trade differences. Economic data also suggest China’s economy may be stabilizing and Europe’s may be bottoming. All of this is good for growth overseas as well as home.
To be sure, the political environment in the U.S. remains divisive, with the ongoing impeachment inquiry and the 2020 election season sure to make it only worse. But as the aforementioned show, several storm clouds that had been hanging over the market have dissipated, giving investors reason to cheer now and beyond the holidays.