Cyclical stocks typically tied to the health of the U.S. economy have driven the Dow Jones Industrial Average (.DJI) near a new all-time high, illustrating renewed investor confidence in the nearly 10-year expansion.
Industrial, financial and energy stocks, including Boeing Co. (BA), Goldman Sachs Group Inc. (GS) and Exxon Mobil Corp. (XOM), have powered the blue-chip stock index higher for nine consecutive weeks—the longest such winning streak since 1995. The 30-stock index has surged 16% over that period, a dizzying turnaround after it fell 19% from its Oct. 3 peak through Christmas Eve and nearly ended its bull-market run.
That rally is largely tied to signals from the Federal Reserve that it has paused in its bid to raise interest rates, along with data pointing to strength in the labor market. Some investors are now wagering the slow but sturdy economic expansion will also continue into the second half of this year and exceed the record from the 1990s.
“Right now and for the foreseeable future, the U.S. is in quite a strong position economically,” said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management. “Even if growth slows, the expectation seems to be that we avoid a recession.”
The Dow industrials closed Friday at the highest level since Nov. 8, putting the index 3% below its Oct. 3 record. The blue chips have gone 96 trading days without setting a record, following a 163-session drought last year. The S&P 500 (.SPX) and tech-heavy Nasdaq Composite (.IXIC) have logged similar 2019 climbs and are 4.7% and 7.2%, respectively, below last year’s records.
The next test for the bull market will likely be the outcome of trade negotiations between the U.S. and China. Investors will be closely monitoring the next stage of talks after President Trump said on Twitter Sunday he is delaying a Friday deadline after which U.S. tariffs on $200 billion worth of Chinese goods were set to rise to 25% from 10%.
Meanwhile, fourth-quarter gross domestic product figures on Thursday and congressional testimony from Fed Chairman Jerome Powell on Tuesday and Wednesday will offer the latest gauges of U.S. growth.
Earnings reports from Home Depot Inc. (HD), Macy’s Inc. (M) and other retailers are expected to provide new insight into the health of the consumer.
“A settlement of trade would be a bonanza,” Microchip Technology Inc. Chief Executive Steve Sanghi said on the company’s earnings call earlier this month. “Our customers and distributors are so cautious…Nobody wants to get stuck with anything depending on what happens.”
Shares of the semiconductor company have climbed 24% this year, as rapidly growing chip makers tied to trade with China have surged in lockstep with cyclical shares.
Still, flows out of stock funds in recent weeks and rallies in safer assets such as gold signal many investors remain cautious, particularly with the U.S. and China needing to resolve several sticking points to reach a trade agreement.
On fourth-quarter earnings calls, several companies cited difficulties in providing 2019 projections amid tariff uncertainty.
Some investors question how long the U.S. economy can stay steady as growth cools across Europe and in China. Lukewarm readings of U.S. orders for manufactured products in December and industrial production in January have also raised questions about whether stocks can reach new highs.
“What we need now is another positive impulse higher,” said Frances Donald, head of macroeconomic strategy at Manulife Asset Management. “That will have to come from growth and economic data.”
Battered manufacturing stocks in particular have benefited from improved sentiment early in the year. The S&P 500 industrials sector is on track to lead the benchmark index for the first time on a quarterly basis since 2013 with its 18% advance.
Aerospace giant Boeing has powered that climb with a 31% surge to a record, while accounting for 25% of the Dow’s 2019 rally. Strong quarterly results at the end of last month, along with trade hopes, have sent Boeing shares soaring. Because the 30-member stock average is weighted by stock price, as opposed to market value like the S&P 500, companies such as Boeing with higher share values have more influence on the index’s movements.
Cyclicals also have led small-cap stocks higher so far this year, an encouraging development for analysts hoping to see strength in different areas of the market.
“It makes me a little more confident that we’ve got something real going on,” said Norm Conley, CEO and chief investment officer at JAG Capital Management, which has increased investments in cyclical stocks in recent weeks. “This is not just a few megacap names catching a bid.”
Also supporting investor confidence are bank earnings, which showed steady lending activity in the latest quarter.
The KBW Nasdaq Bank Index (.BKX) has risen 17% this year. Stabilizing long-term Treasury yields have helped banks because they borrow on short time horizons and lend with longer time frames.
With its 17% recovery this year, Goldman Sachs is on track for its best quarter since 2016 and has accounted for 7.3% of the Dow’s year-to-date climb.
And U.S. crude oil posted its best ever 36-day start to a year through Friday with a 26% rebound, lifting shares of producers such as Exxon Mobil and Chevron Corp. (CVX) Other commodities including industrial metals that are vital for construction also have hit their highest level in months, sending a satisfying signal about growth to investors who use them as an economic indicator.
“We still think the U.S. is a good place to invest,” said Jake Halladay, managing director at Bel Air Investment Advisors. “As everything has stabilized, clients are getting more confident.”
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