Fall back? Those who crave an extra hour’s sleep welcome turning back the clocks to standard time this weekend. For others, darkness falling when the clock strikes an hour earlier is depressing (except if it means that cocktails will be served sooner).
For the stock market, it’s more about springing forward as it enters what’s historically the best six months of the year, with the major averages already at or close to historic highs. And that’s with a trade war hitting global commerce and an impeachment drama hanging over the nation’s capital. That’s even without a looming U.S. election, which is all but certain to be hugely divisive, both at the presidential and the congressional level. Call it prosperity without comity.
The S&P 500 index (.SPX) and the Nasdaq Composite (.IXIC) closed at records on Friday, up 1.5% and 1.7% this past week, respectively, while the Dow Jones Industrial Average (.DJI) rose 1.4% but landed 0.04% short of its record. Looking at the performance through the year’s first 10 months, the S&P posted a total return (including dividends) of 23.16%; the Nasdaq, 26.06%; and the Dow, 18.19%. The year-to-date numbers are flattered by timing because the risk markets (equity and speculative-grade debt) bottomed around the end of 2018. On a 12-month basis, the S&P’s return is substantially lower, but still impressive, at 14.22%, along with the Nasdaq’s 14.77% and the Dow’s 10.32%.
That’s a product of an economy and earnings that are growing moderately, along with a shift in monetary policy that’s now pushing forward, rather than pulling back. Interest rates have come down, with the Federal Reserve this past week reducing its policy rates for the third time in 2019, while the dollar has fallen 2% from its peak at the end of September. That’s not only a plus for U.S. exporters, but for emerging markets, which have made 47 interest rate cuts of their own in the past year, according to Evercore ISI’s count.
If there’s a fly in the ointment (and there always is), it’s that so much of the market’s gains and aggregate value have been concentrated in megacap technology stocks, such as Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), and Google parent Alphabet (GOOGL)—a total of $4 trillion, or more than all of the Russell 2000 small-cap index (.RUT). That said, breadth—the number of advancing stocks versus decliners—on the New York Stock Exchange also is at a peak, indicating relatively broad participation in the major indexes’ march to record highs.
The markets stand at these exalted levels as they head into their strongest seasonal period, based on history, according to the Stock Trader’s Almanac. The advisory’s technical indicators actually marked Oct. 11 as the start of that season this year (the date happened to coincide with the Fed’s announcement that it would alleviate the liquidity tightness in the money markets by purchasing Treasury bills).
Economic fundamentals also are positive for the market, as represented by the October employment report released on Friday. Nonfarm payrolls rose by 128,000 last month, much more than the 85,000 economists had forecast after adjusting for the strike at General Motors (GM). Automotive payrolls were off by 42,000 in October, while government employment fell by 3,000, owing to a reduction of 20,000 temporary census workers. Moreover, the two preceding months’ tallies were revised up by a total of 94,000. The unemployment rate did tick up, to 3.6% in October from the half-century low of 3.5% touched in September, but that also was a sign of strength, reflecting a continued surge of people entering the labor force.
On the political front, the House of Representatives voted for a formal impeachment inquiry of President Donald Trump. While polls find the public split pretty much down the middle on impeachment, the folks at Renaissance Macro observe that in the 1990s a strong economy during the Bill Clinton impeachment provided the backdrop for that decade’s bull market. Plus, the Fed then also made “insurance” cuts in its rates to sustain the expansion in the absence of inflation pressures, as is the case now.
Past isn’t always prologue, but the current situation—notably an elongated expansion backed by a friendly Fed, played out against a contentious political backdrop—suggests parallels with the 1990s. One difference is the recent culling of some egregious excesses, such as the crash and burning of WeWork, before they reached the public markets.
RenMac suggests bringing back the ’90s grunge group Nirvana. Smells like bullish spirit.
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