Equity markets broke out to new highs in November, the 21st month after 20 months of “markets going nowhere” and in this week into Thanksgiving, equities seem to have boosted by new underlying bids.
We believe the strength and recent persistent bid reflects the fact that investor positioning remains “uncomfortably” defensive. This along with strong seasonals supports our view that the S&P 500 likely >3,200 before year-end (perhaps even higher).
The re-positioning towards risk-on is stemming from mounting evidence that 2020 economy > 2019 economy, so this is not simply blind “buying of momentum.”
From a timing perspective, we are now starting to suspect that the highs of the year (3,200 or 3,300?) might take place soon, like in the next week or so. Our conviction is not high on this, and this is also not suggesting economic momentum is faltering.
2019 has shown that economic momentum is not the same as stock price moves. For most of 2019, economic momentum was weak, PMIs tanked, yet stocks performed admirably.
Rather, we believe the faltering of stocks is the absorption of the “FOMO” bid that we have seen since the start of the month. This is more of a gut observation, rather than a “high conviction” call.
BOTTOM LINE: We are looking for 3,200 or so in the next week or so, but suspect this could be the high for the year.
4 THINGS WE ARE THANKFUL FOR IN 2019:
Gratitude #1: Fed’s Powell fixed the yield curve. Don’t fight the Fed, and they have been supportive of risky asset. The US Federal Reserve remains the single most powerful market entity in the world. And the yield curve is now normalized across the term structure.
Gratitude #2: China and US realize Trump-Xi partnering > “self-partnered.” We believe both sides are genuinely focused on getting a trade deal done by end of year. While this remains uncertain, “waiting out 2020 elections” is proving to be a risky strategy, since Trump likely looks strong into 2020 and the Dems would be potentially harsher.
Gratitude #3: Consumers ignored “Recession-mania” and “Armageddonists.”Fortunately, consumers remained optimistic despite pervasive gloom in the media. Michael Cembalest, JPMorgan Asset Management Vice Chairman, wrote a great commentary (JPMorgan Eye on the Market) regarding the surprising boldness of those doomsayers and how it is good for business. In fact, one such economist makes this statement in a Financial Post article ((Financial Post story)).
Gratitude #4: The prescient powers of the credit market foretold us in January that 2019 was a repeat of 2009. James Carville, Democratic Strategist, famously once said if he was reincarnated, he wanted to “be the bond market.” The bond market made two prescient calls this year. At the start of 2019, the High-yield market told us stocks should rise 25% (correct) and the long-term yield curve told us PMIs would bottom in Fall 2019 (correct)
HAPPY THANKSGIVING TO YOU!!!!