US stocks set a record high on Monday, surpassing levels they last reached in the summer and cementing a return of investor confidence built on progress in US-China trade talks and interest rate cuts from the Federal Reserve.
The benchmark S&P 500 (.SPX) closed 0.6 per cent higher at 3,039.4, taking it past its previous peak of 3,025.9 on July 26 and notching an intraday record of 3,044.1 in the process. That brought its advance this year to 21.3 per cent.
“Optimism is hitting investors from all directions,” Charlie Ripley, senior investment strategist at Allianz, said, pointing to progress on trade talks between Washington and Beijing, market expectations for a Fed rate cut this week and upbeat earnings results.
“Against this backdrop, we would expect market optimism to continue to improve, which is particularly important as we head into the holiday spending season.”
The push into new territory comes as US earnings season moves into top gear, with about one-third of the S&P 500 reporting third-quarter figures this week. Those out the door in previous weeks have beaten expectations and signalled cautious but not especially downbeat outlooks.
The 7 per cent increase in the S&P 500 since the end-of-August nadir has also coincided with a rebound in the yield on the 10-year Treasury bond, reflecting a softening of investors’ concerns about the long-term prospects for the global economy.
Against the backdrop of Washington and Beijing struggling to agree a deal on trade, investors had became wary over the summer about the trade war’s impact on global growth. At the end of August, the yield curve, which reflects yields on government bonds of different maturities, was flashing its strongest prediction of a recession since the financial crisis.
But the US and China inched their way to an interim trade deal which both sides say they are hopeful of signing soon, to prevent additional increases in tariffs.
And investors have also grown more confident in the Fed. While the central bank in July cut interest rates for the first time since the crisis and backed it up by easing policy again in September, it also appeared reluctant to signal much extra support. Recent weak readings on the global and domestic manufacturing sectors have seen the probability of an October rate cut jump to about 90 per cent, more than double the likelihood a month ago, according to futures prices.
A third, “insurance” cut at Wednesday’s policy meeting would lower the range for the benchmark borrowing rate 25 basis points to between 1.5 per cent and 1.75 per cent.
Within the S&P 500, technology has retained its place as the index’s top-performing sector in 2019, while energy remains the laggard as the US’s shale oil boom slows.
High-dividend sectors like real estate and utilities had done well over summer as brewing recession concerns drove government bond yields to multiyear lows and investors instead looked to companies in these sectors for higher income. They have since trimmed their gains as bonds sold off.
Investors have noted a twist in the tale of the stock market’s latest ascent. This most recent leg higher has been driven by so-called value stocks, solid companies available at historically low valuations, which can often be in economically sensitive sectors. This is as opposed to growth stocks, such as those in technology, that are growing regardless of the economy. Bargain-hunting investors lept in after the performance of value relative to growth hit its worst near the end of August.
On Monday, President Donald Trump tapped out a mostly markets-focused message on Twitter, marking the new intraday record for US equities.
“The S&P just hit an ALL TIME HIGH. This is a big win for jobs, 401-K’s, and, frankly, EVERYONE! Our Country is doing great. Even killed long sought ISIS murderer, Al-Baghdadi. We are stronger than ever before, with GREAT upward potential. Enjoy!”
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