The new Wall Street prayer ends like...yadda yadda yadda “and to a bull market without end. Amen.”
The Nasdaq, the Dow, the S&P 500 are all going to record highs. Perhaps only a recession (not happening), World War III (not happening) or a Bernie Sanders, Elizabeth Warren presidency can topple it. And even that’s not guaranteed.
The economic recovery that looked long in the tooth last summer (or was it the summer before?) keeps on recovering. That’s the world all the economists use now...recovery. What exactly is the U.S. economy recovering from? The Great Recession was 11 years ago.
The International Monetary Fund used the word “recovery” again in their latest World Economic Outlook, released in Davos at the World Economic Forum on Monday. Global growth is projected to rise from an estimated 2.9% in 2019 to 3.3% in 2020 and 3.4% 2021, which is lower from their previous estimate but the market seems willing to put the blame on India for that.
Brazil’s stock market is at a record high. Russia’s too. China is beating all expectations.
“Diminishing downside risk, in the form of recent trade deals and an apparent ‘truce’ on U.S.-France tariffs is helpful, too,” says Neil MacKinnon, an economist for VTB Capital in London. Add in global monetary dovishness from the U.S., Europe, Brazil, China and Japan, and that provides the underpinning for growth in most of the world’s equity markets.
The bull market isn’t licked yet.
Fourth quarter 2019 earnings continue to look good.
Around 10% of S&P 500 companies have reported so far, but the percentage of companies reporting positive earnings surprises is around 72%, right around the 5-year average.
The S&P 500 has hit record-highs this month after returning 31% in 2019. The market has been unseasonably calm thus far in 2020, with the Volatility Index (the VIX) sitting near multi-year lows.
Many have cited stabilizing U.S.-China trade relations, an accommodative Fed and the de-escalation of tensions with Iran as factors contributing to the market’s steady drive higher, say analysts from Glenmede, led by chief investment officer Jason Pride.
On the macro front, most everything seems to be going right to justify high valuations, from a phase one trade deal reducing the odds of unexpected tariff hikes in the near future to the Fed increasingly willing to backstop growth fears with monetary stimulus.
As a result, equities are awarding “goldilocks” scenario valuations to domestic equities due to a confluence of abating risks, Pride wrote in a note to clients on Tuesday.
The strength of the move over the last few months has some remembering January 2018 and wondering if the rally still has legs or whether markets are gearing up for some serious profit taking. These are important questions for investors, especially retail investors who may be worried about buying into a rally and paying too much for stocks.
European asset management firm Unigestion says those parallels are “fairly weak” as economic and financial conditions actually point to even “more upside potential” than downside.
For the newcomer to this market, this bull run is a bit like being Clark Griswold in the movie Vacationwhere he is debating with himself whether or not he should jump in the pool naked with 1980s supermodel Christie Brinkley. “This is crazy. This is crazy. This is crazy.” Jumps in anyway.
Consensus is for good, but not much better than last year, earnings from the fourth quarter. If those earnings are better than expected, the market will climb higher, pushing up earnings multiples already in the high teens for the S&P 500 Index.
If U.S. companies are able to capitalize on new trade deals, especially the new Nafta, then there is also the chance for some profit margin recovery in earnings in the first or second quarter.
If peak tariffs are behind us, and there’s a pickup in global growth, as the IMF is saying again this week at the World Economic Forum, then people have good reason to remain invested.
Some fund managers will be looking for a pick up in manufacturing capex both here and abroad. The phase one trade deal could prove to be the incentive companies were waiting for to invest again in their business instead of using cash for share buybacks.
Such an uptick in capex, especially in the U.S., would give another boost to an economy long past recovery and moving ahead as healthy as it ever has.
Sorry, short-sellers. Maybe next year?
This article was originally published on Forbes.
