The Old Bull Has Life in It Yet; Stocks Stage Big Comeback
December 6, 2019

In this strategy briefing…

FSInsight Investment Views

Near Term View: PMIs bottoming, 3 rate cuts done, upturn in sentiment = very bullish. Stick with cyclicals, avoid defensives
YE Target: 3,185 (YE P/E 17.5x · 2020 EPS $182)
Style: Cyclical, US better than RoW

Your Weekly Roadmap

Vito J. Racanelli
Formerly a Senior Writer at Barron's, where he covered stocks, bonds, and financial markets.

The Old Bull Has Life in It Yet; Stocks Stage Big Comeback

At the risk of repeating something we’ve been saying all year, this is a resilient bull market. Indeed, very resilient. That the bull’s been trotting along generally steady over a decade now is not a legitimate “sell by” date. Bull markets don’t die of old age.

I like a recent comment by Ryan Detrick, senior market strategist at LPL Financial, who says, “Bull markets do not die of old age. They die of excess — overspending, overleverage, overconfidence.” Doesn’t to seem to be much evidence of these “overs,” is there?

And others note similar sentiments: bull markets don’t die of old age, but rather they’re killed by the Federal Reserve. Clearly, there was a “near miss” (as pilots say) last fall, when the Fed kept hiking rates—finally to beyond what was necessary as it turned out, and surprising mainly the policymakers. For more on this, see pages 3 and 6. After almost choking the rally last year, now the Fed is the market’s friend. Long may it last.

This bull will die. They all do. It won’t be of old age, however. As long as inflation remains low and the economic backdrop fosters corporate EPS growth, I agree with my colleague Tom Lee, that the bull should make new highs in coming weeks and months.

This past week the market action was a microcosm of 2019. In the early part of the week, the market tanked on some weak U.S. data and yet another negative trade and tariff tweet from President Donald Trump, only to perk up nicely not long after.

In the first half of the week, the market dropped nearly 3% after President Donald Trump suggested a U.S.-China trade deal might have to wait until after the 2020 elections. That followed news that November’s ISM PMI registered 48.1%, down a bit from 48.3% in October and below expectations of 49.2%. But as Tom Lee points out on page 3, the ISM PMI diverges in crucial ways from the Markit PMI.

Yet even before Friday’s strong jobs data, the market began to crawl back. There’s that resilience. And after data emerged Friday that showed employers added 266,000 jobs in November and unemployment matched a 50-year low of 3.5%, topping expectations, it was off to the races again for stocks.

So the Standard & Poor’s 500 index finished around 3146, down smidge from the all-time high 3154. It is up over 25% this year. Given these ups and downs, what would have happened had you not paid any attention at all to the market gyrations last week? Well, with the SPX within a whisker of the all-time high set the day before Thanksgiving, sometimes it pays to ignore the noise.

David Rosenberg at Gluskin Sheff estimates 95% of the return in 2019 has come from P/E expansion. Well, yeah, given SPX EPS growth is nil this year at about $163, up a tad from 2018. Next year, the consensus is for $172, or about 5.5% growth. However, if—as we’ve been saying—the 2020 economy will be stronger than 2019’s there could be upside to that EPS figure.

And if you think this has been a particularly volatile market year, think again. According to DataTrek, as of Dec. 4, the S&P 500 index has risen or fallen by 1% or more on a total of 38 days so far this year. That compares to the annual average of 53 over the past 60 years.

Volatility is therefore running below pace in 2019. Also according to DataTrek, years that have outsized returns along with an abnormally strong January—which describes 2019 to a T—are followed, on average, by years with a 10% rally and up 60% of the time.

By the way, over the last 100 years, December has been the strongest month, with the Dow Jones Industrial Average up a mean 1.44% that month, with positive returns 68% of the years. One thing of which I’m fairly certain is that this December’s stock market activity will look nothing like that of 2018.

Investors who do watch the weekly volatility should next week keep an eye on US-China trade talks. It will return to the forefront of market sentiment ahead of the Dec. 15 deadline for new tariffs on consumer goods to take effect. If the phase one deal isn’t signed, look for a minor sell off again. But as Tom Lee notes below, we think these are buying opportunities broadly speaking.

Quote of the Week: According to Bloomberg News, owner Michael Bloomberg has spent $59 million on advertising since entering the race, relatively late in the political season. When he was asked why he had changed his mind about running for the presidency, after saying in September that he would not, Bloomberg said the Democratic field was weak. “I watched all the candidates,” he said. “And I just thought to myself, Donald Trump would eat them up.” Uh-huh.

Questions? Contact Vito J. Racanelli at or 212 293 7137. Or go to

signature of Vito J. Racanelli
Vito J. Racanelli, Managing Director, Senior Editor and Market Intelligence Analyst

Tom Lee's Equity Strategy

Tom Lee
Previously Chief Equity Strategist at J.P. Morgan from 2007 to 2014, top-ranked by Institutional Investor every year since 1998.

Market Overreacts to Weak ISM PMI; Pullback Buy Opportunity

Ben Graham, the legendary mentor to the legendary Warren Buffett, reportedly said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Last week’s stock minor sell off was a pretty good example of voting not weighing, and, more importantly, it gives investors a way to buy into the market at a pause before, as I believe, it will go higher.

201912071 Market Overreacts to Weak ISM PMI; Pullback Buy Opportunity

The hiccough began last Friday but intensified Monday on a couple of things. First was an overreaction to weak U.S. Purchasing Manager Indexes, and then to—surprise surprise—another tweet from President Donald Trump that seemed to put a damper on whether a trade deal will be struck before the December 15th deadline for new U.S. tariffs on Chinese products.

Equity markets sold off most of last week, down nearly 3% at one point. While the cumulative decline isn’t significant in the grand scheme of things, the sharpness of the reversal is notable and the abrupt change in character from much of November stands out.

Selling intensified Monday with the downside reading of US ISM Manufacturing report, (48.1 vs 49.2 expected). I would be a buyer of this pullback. My base case remains that the 2020 economy will be stronger than 2019’s, setting the stage for a “revival of animal spirits” (investor perception) and thus contributing to a potential move towards 3,185 (my target) on the Standard & Poor’s 500 index before year-end.

Mind you, equities have already come back some, and the market is not much below the all-time highs set on Nov. 27, but you can still hear the bears calling out, “This is the big one.” I don’t believe that. And one data point is just that.

For example, the Markit PMI shows improvement even as the ISM missed estimates. The November Markit US PMI (reported 12/2) rose to 52.6 from 51.3 and the best readings since April, 2019. This is in contrast to the US ISM showing flat 48.1 vs 48.3 the previous month.

The average investor might not know that discrepancy between ISM and Markit reflect some important differences in methodology. Markit weighs forward looking indicators, while the ISM is a simple average of five components, and Markit itself has indicated that it believes ISM tends to weight larger companies ( explaining-us-manufacturing-pmi-surveydivergences-Oct19.html).

201912072 Market Overreacts to Weak ISM PMI; Pullback Buy Opportunity

Thus, I think the Markit divergence, an improvement in this case vs ISM weakness mitigates the “miss” value of the ISM reading.

Moreover, the broad data shows that global PMIs are generally improving, and think back to when investors were fretting the “global economic slowdown.” The JPMorgan Markit Global PMI rose to 50.3 vs 49.8 (Oct.), moving above 50 for the first time in 7 months. (Above 50 indicates expansion, below 50 contraction.)

I think this further buttresses the idea that in 2020, the economy will be better and should revive animal spirits. Only Germany remains languishing, but this isn’t surprising given the linkage to China.

Another way to think about the market’s risk/reward is to look at the relative strength index (RSI). On the 4-hour chart (nearby), we can see that the RSI is severely oversold. For most of 2019, when fundamentals are improving, these oversold readings of RSI are bullish.

And again, as we’ve noted previously several times, central bank easing plus easing financial conditions equals GDP upside. This will build a meaningful tailwind for the stock market, and should add an estimated 0.5% to US. GDP growth in 2020, according to a recent report from Goldman Sachs, as well as upside to S&P 500 corporate EPS growth.

Bottom line: I believe there are more funds that “need performance” than those “playing with house money” and as a consequence, it seems likely that pullback will be bought, particularly by underperforming fund managers who don’t want to be left out.
And, unlike the bears, we do not think this is a repeat of December 2018.

Figure: Comparative matrix of risk/reward drivers in 2019
Per FS Insight

201912073 Market Overreacts to Weak ISM PMI; Pullback Buy Opportunity

Figure: FS Insight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019

201912074 Market Overreacts to Weak ISM PMI; Pullback Buy Opportunity
signature of Tom Lee
Tom Lee, Head of Research

Fed Watch

FOMC Meeting Next Week. No Iceberg In Sight; All Ahead Full

The Federal Open Market Committee meets this coming Wednesday, Dec. 10-11. It’s the last meeting of 2019 and investors can be fairly certain there will be no fireworks this time. None. This marks an important change from the way things were 12 months ago.

That’s all to the good given what happened at that last FOMC meeting in 2018 on Dec. 20. Think back now to that conclave, even though you probably don’t want to. That was when the FOMC hiked the Fed funds rate for the third time in the year, and after six hikes in the previous 24 months.

The global stock market was falling apart, with investors worried about trade and a then evident global growth slowdown (not the case now as you can see on page 3.) A kind of mini-panic ensued and American stocks entered a bear market, if briefly, by Christmas Eve, down 20% on an intraday basis from September’s high. This should be laid squarely at the Fed’s door, which we’ve said a few times.

Of course, since then the Fed has reversed course, something both investors and President Donald Trump have found pleasing. And the market is up about 25%.

So what about this upcoming meeting. My guess is the Dec. 11 press conference afterwards with Chairman Jerome Powell might be of minor interest, but I’m guessing he’s not going to go off script in any way. There will be a lot of Happy Holiday’s kind of stuff. His playbook says the Fed has done enough cutting, that it is data-dependent, and, oh by the way, a new round of hikes is too far off to contemplate. And see you next year. All in all, good news for U.S. equity investors.

The CME Fed futures market, which has a good predictive track record about rates, shows investors expect the Fed funds rate to be untouched at yearend and that the probabilities of a new Fed hike don’t rise until late in 2020.

Separately, an interesting recent WSJ article argues that the Fed has now set a high bar for raising rates and “one that looks unlikely to be met for a long while.” The paper quotes Powell from October’s FOMC press conference as saying, “We would need to see a really significant move-up in inflation that’s persistent before we would consider raising rates.”

It’s going to take some doing to get to 2% inflation, given the price data we’ve been seeing lately. The personal consumption expenditures index, which the Fed follows, was up 1.3% in October. Fed officials have made noises that suggest they would be comfortable with higher than 2% inflation for a short while.

Separately, the New York Fed continues to add temporary liquidity to the money markets, with tens of billions going into to the financial system through the use of repos and short-term loans.

Bottom Line: The Fed’s on hold until further notice.

The U.S. Treasury 10-yr note yield was around 1.84% up from 1.77% last week and below 1.5% in September.

Upcoming: 1/28-29 – FOMC meeting. No action expected.

GRANNY SHOTS: Best bets in 2019

GRANNY SHOTS: Best bets in 2019 - Week 49

Below we’ve highlighted stocks that we recommend across at least two of our investment strategies for 2019. These companies could benefit from multiple themes and secular tailwinds – clear picks in our view for the first half of the year.

Figure: Granny Shots are the “best of the best”
Stocks which appear in multiple themes. Source: FS Insight

201912071 3 GRANNY SHOTS: Best bets in 2019   Week 49

Figure: Granny Shots Portfolio Performance
Monthly. Source: FS Insight. FactSet as of 12/5/19.

201912072 2 GRANNY SHOTS: Best bets in 2019   Week 49

Figure: Intersection of investment recommendations by strategy
As of 12/5/19, source: FS Insight, FactSet

201912073 2 GRANNY SHOTS: Best bets in 2019   Week 49

The stocks in the Granny Shots portfolio collectively outperformed the S&P 500 by 640 bps since its inception (S&P 500 is up 20.1% during the same period).

Technical Strategy

Robert Sluymer
Former Managing Director leading RBC’s U.S. Technical Research team with over 26 years of expertise in investment research and technical analysis.

Technical Backdrop Bullish; PPG Chart Looks Positive

“Trade what you see, not what you think” was good advice passed on to me early in my career by a institutional portfolio manager with over 40-years experience managing global equities. I caught up with him recently and asked whether he would ever see markets as unusual as they are today, or given his tenure, have markets always seemed in turmoil?

His response? “Every period seems unique, and weird, inflation of 15% in the 70s, Japan/Taiwan bubbles in the 80s, technology and momo in the 90s, deflation and bankrupt banks in the 2000s…remember TARP (Trouble Asset Relief Program)?, aggressive central banks and negative rates the past 10 years. Thus there is no normal … just learning to deal with each crisis as it occurs … and keep in mind advice I got around 1982, the US has survived and prospered 230 years … I wouldn’t bet against it.”

That pretty much sums why investors and traders should “trade what you see, not what you think,” when using technical analysis, always. With that in mind, the technical backdrop for equities remains bullish despite the ongoing concerns over the economy, trade and the pending U.S. federal election in 2020. Long-term cycle indicators continue to build to the upside in what looks to be a very normal emerging bull market.

Pullbacks are likely to remain shallow with the next important tactical pause likely in mid-Q1 at which point we expect our weekly momentum indicators to peak. Once the weekly data begins to peak, I’ll reevaluate the technical backdrop. But I would expect a broad consolidation to develop that would support a more balanced/diversified portfolio into the summer and fall of 2020.

Along those lines, I’m featuring PPG Industries (PPG) this week to reinforce the point of trading what you see. PPG makes a long list of chemical products including protective and decorative coatings, glass related, metal cans, closures, plastic tubes, used by automotive, aerospace, marine, architectural and general industrial companies.

201912071 1 Technical Backdrop Bullish; PPG Chart Looks Positive

Put simply, PPG is deep in the gearbox of the economy. What does the chart suggest? I think the message is simple: After 5-years of trading in a broad range, PPG has broken out and is beginning to trend to the upside, signaling business is getting better for this economically sensitive company. Yes, it has rallied over the past few weeks, but what’s wrong with owning stocks that are going up? Long-term relative performance versus the S&P 500 is turning positive in a classic bearish-to-bullish reversal.

Bottom line: Accumulate pullbacks as part of an emerging bull cycle.

201912072 1 Technical Backdrop Bullish; PPG Chart Looks Positive
201912073 1 Technical Backdrop Bullish; PPG Chart Looks Positive
signature of Robert Sluymer
Robert Sluymer, Managing Director and Technical Strategist

US Policy

L . Thomas Block
Formerly Global Head of Government Relations at J.P. Morgan for 21 years, and previously served as Legislative Assistant and Chief of Staff in the House, and Legislative Staff Director in the Senate.

U.S.-China Tariff, Budget Resolution Deadlines Loom

It appears that ebb and flow of the U.S.-China trade talks continues to be the issue which markets focus on, while investors largely ignore the back and forth on the potential impeachment of President Donald Trump by the House of Representatives.
Impeachment seems to be a side show for markets, at least.

Early in the week, President Trump mused that there may be no trade deal with China until after the 2020 election, and the market duly fell sharply. But the next day those directly involved changed the message to be more optimistic.

I think it’s important for investors to remember that the President is a master showman and loves to drive daily headlines, something we know by now that he can always do on the issue of China trade. It is an obvious a positive sign that China remained at the table after the President recently signed the Congressional legislation aimed at supporting protesters in Hong Kong.

However, similar legislation is moving through Congress to support ethnic Uighur Muslims in western China. Like the previous bill on Hong Kong, the new legislation has sanctions against Chinese officials but the use of sanctions is left to the President, and the Administration well understands the link between sanctions and trade. Moreover, the December 15 deadline looms as an important date with the scheduled new U.S. tariffs on Chinese consumer goods coming into effect so next week could be crucial on Phase One talks.

Speaking of deadlines, another important one is the December 20 end of the current Continuing Resolution (CR) funding the federal government. Congressional sources are talking of a weekend push to try to resolve most of the outstanding issues, but funding of the President’s border wall remains a potential deal breaker.

A big question is whether the headline loving President would find a Christmas government shutdown acceptable when weighted against the positive politics of fighting for funding the border wall. No one knows, perhaps not even President Trump.
This coming week could tell the tale.

Figure: Top Trump Tweets

201912071 2 U.S. China Tariff, Budget Resolution Deadlines Loom
signature of L . Thomas Block
L . Thomas Block, Washington Policy Strategist
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