S&P 500 Just 3 Points From Its Record

Stocks As Close To Record As Possible

Somehow stocks rallied, but still didn’t reach their record high. S&P 500 increased 0.41% to 3,022.55. Record is 3,025.86. Any increase on Monday should break the record. It has been painstaking. For much of the past couple months the S&P 500 has been within a couple percentage points of its record. I’d like to see the economic slowdown end before betting heavily on stocks. 

Traders always try to get ahead of the game to make extra money. Because of this, when there are actual recessions, stocks fall very quickly. If investors were more cautious, stocks wouldn’t fall as sharply when the economy takes a turn and profits fall.

Some people laugh at the concept of following averages. For example, when stocks are up for the year heading into Q4, they usually do really well. Q4 is the best time of the year and it gets better when the market has momentum. The table below shows how the first quarter often determines the year. 

When the S&P 500 has been up 10% or more in Q1, the market has never fallen on the year and the average return is 20.7%. The S&P 500 is now up 20.7%. This data works. It’s still good to pair it with deeper economic analysis, but it does have value. This will be important to look at in a couple months when 2020 starts. S&P 500 won’t increase 10% in Q1, but it might increase. That will set the tone for the rest of 2020.

Details On Friday’s Action

Nasdaq increased 0.7% and the Russell 2000 increase 0.55%. VIX fell 1.06 to 12.65. The market is starting to get overbought which could make buying protection a viable option. CNN fear and greed index rose 5 points to 62 which is greed. 2 worst sectors were real estate and utilities because treasuries sold off. Those sectors fell 1.31% and 1.09%. Consumer discretionary sector fell 0.21% partially because Amazon stock fell 1.09% on its earnings report.

Amazon stock didn’t do as badly as its after hours trading indicated as it rallied from its low open this morning. On the one hand, AWS missed estimates and only had 9% profit growth. On the other hand, its stock is only up 17.27% in 2019. That’d normally be a great year, but this year it is underperforming the S&P 500. 

Apple is up an absurd 56.32% year to date. That makes Apple’s earnings report next week that much more interesting. Along with Apple, Facebook and Alphabet will be reporting next week. Mark Zuckerberg was grilled on Capital Hill this week. Facebook recently launched a news service to compete with Apple News.

2 best sectors on Friday were tech and the materials which rose 1.2% and 1.04%. Financials rose 0.77% because of the increase in yields. And, financials have already priced in the rate cut on Wednesday. Everyone knows is will happen.

Treasuries See A Cyclical Turnaround Next Year

As we get set for this rate decision, there is a 22.1% chance of another cut in December. It’s unlikely to occur. Traders are clearly optimistic about nominal GDP growth in 2020 as the 10 year rose 3 basis points to 1.79%. That’s the highest yield since September 17th

10 year yield looks poised to rise back above 2%. 2 year yield rose 4 basis points to 1.62% which lowered the odds of a rate cut in December. And it tightened the difference with the 10 year yield to 17 basis points.

Current effective Fed funds rate is 1.85%. If the Fed cuts rates 25 basis points and it goes to 1.6%, it will be below the 2 year yield. 2 year yield will no longer be forecasting more rate cuts. It’s very clear the bond market is anticipating an acceleration in growth in 2020. The inversion wasn’t a recession call. 

That being said, yields need to rise a bit more to ensure the strength of that acceleration call. Right now, it’s flimsy which makes sense because there’s little proof the economy is about to boom or even just stop slowing. The NY Fed’s Q4 Nowcast is 0.92%. That shows how weak the current survey data is.

Phase 1 of The Trade Deal Is Getting Closer To Be Finished

Surprisingly, the trade negotiations have been going well and some progress is being made. The 2 sides have gotten close to finalizing phase 1. Personally, I think China will agree to buy US agriculture and America will lower some of the tariffs or agree to not implement the tariffs set to go into effect in mid-December. Obviously, it’s tough to analyze anything until the deal is published. That could occur in the next couple weeks. President Trump originally said the negotiations would take 3 weeks.

News being tweeted out is that China will resume buying agriculture products at 2017 levels if America lowers its tariffs to 2017 levels. That’s sounds like a weak deal for America. It seems like a big waste to go through with months of a trade war just to get China to buy agriculture goods at levels from 2 years ago. It’s tough to follow news reports which is why we need to see an official agreement before figuring out the economic impact.

Conclusion

The market is within a couple points of its record. America is closing in on phase 1 of the trade deal. And most firms have beaten EPS estimates. Everything sounds like it’s doing well. Except for the pesky cyclical slowdown which will cause Q3 GDP growth to be below 2%. 

Stocks seem almost willfully ignorant of the economic weakness. The economy doesn’t need to fall into a recession to cause stock market volatility. I don’t see a recession coming, but I do see a modest correction occurring soon. It could be catalyzed by trade talks failing or a weak October jobs report.  

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