Equity markets were little changed in volatile trading, as the S&P 500 broke its five-week winning streak. The 31% gain for the S&P 500 in 2019 was the best since 2013 and the second-best in the past 22 years. Gains were extremely broad-based, with double-digit gains in most asset classes, including fixed income.
Markets are beginning to show some anxiety as tensions in the Middle East rise following the airstrike late last week that killed Iranian military commander Qassem Soleimani. Iran has pledged to retaliate, and speculation is that it will come in the form of cyberattacks. Iran said that it is suspending commitments under the 2015 nuclear deal, and Iraqi parliament voted to expel U.S. troops from the company. Given the potential disruption and the heightened uncertainty, equity markets have remained remarkably resilient. Oil prices have risen to an eight-month high, but historically, news like this would have had a much larger impact.
The resilience of the market is largely due to a sharp spike in investor sentiment. Surveys that showed historically low confidence as recently as August are now at extreme positives. The CNN Fear & Greed survey was at 10 on a scale from 0-100 a year ago touched 97 last week and is currently at 93 (“extreme greed”) despite the Middle East tension. Underlying metrics impacting the index are historic highs in new 52-week highs, tight high-yield spreads, strong participation in the rally (“breadth”) and low put-option buying relative to calls. Spikes in investor sentiment are normal following rallies and are often signs that the market is due for a pullback, though the lack of equity fund buying shows that investor sentiment and actions are not in alignment. A period of consolidation following the strength of the move is not unexpected or unhealthy.
While sentiment surveys show strong confidence among investors, consumers and small businesses, corporate CEOs and CFOs do not share that optimism. Despite the improved outlook for trade with China, the ISM manufacturing index showed its weakest reading since the financial crisis at 47.2 with poor readings on new orders and employment. The Conference Board CEO survey shows a potential recession tops the list of concerns for 2020, up from third last year. Stress points include the sluggish domestic economy, trade uncertainty, a tight labor market and political instability. Despite the nervousness, the outlook for global growth is for a slight acceleration to 2.5%. Given signs of stabilization in the global economy and fading trade tensions, it is likely that the outlook for manufacturing and capex improves in coming months.
President Trump said he will sign “phase one” of the trade deal on January 15 in a White House ceremony that will not include President Xi, and Trump is planning a trip to Beijing soon to begin discussions on “phase two.” Few details of “phase one” have emerged, though skepticism is growing over structural changes. Economic data in China continues to struggle, with the Caixin manufacturing PMI reading of 51.5 versus 51.8 in November. New order growth fell to a three-month low, and the 12-month business outlook remained relatively weak. Over the past three months, the S&P 500 has returned 12%, with the MSCI Emerging Market Index returning 14% and China returning 15%. Emerging markets have severely lagged in the current bull market, and historically when emerging markets begin to outperform, they do so for an extended period.
Strong gains in 2019 are a strong omen for continued gains in 2020. Over the past 30 years, there have been eight years with S&P 500 returns more than 20%. The S&P 500 was positive the following year on each occasion by an average of 17%.
What to Watch
A busy week of economic data awaits, with composite PMI on Monday, durable goods and non-manufacturing PMI on Tuesday, consumer credit on Wednesday and the monthly payroll report on Friday.
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