The S&P 500 Index has now gained in eight of the past nine weeks, adding a total of 7% since early October. Marked by the beginning of earnings season, this period has seen a shift in investor focus from Fed stimulus and a trade deal to stabilizing global growth and better-than-expected earnings.
Wall Street analysts have been taken off guard by the strength of equity markets this year. Following the weak performance in the fourth quarter of last year, most analysts in January cut expectations for the S&P 500 this year to roughly 2,900. With the S&P 500 currently near 3,150, analysts have been forced to upwardly revise 2019 expectations. The outlook for 2020 remains quite modest, with the average forecast only 3% higher than today. This is likely to rise, as the last eight times the S&P 500 has been up more than 20%, the following year was positive, by an average of 17%.
The payroll report showed a major upside surprise, adding 266k versus an upwardly-revised 156k in October. The three-month average of 205k was well above the 10-year average of 183k despite a shrinking available labor force. Importantly, average hourly earnings for private, non-supervisory jobs jumped by a cycle-high of 3.7%, providing a healthy backdrop for holiday spending. This was also seen in consumer sentiment, with a reading of 99.2 versus 96.8 in November. The current conditions reading was 115.2 versus 111.6.
The frustration with the China trade deal continues, though the market appears to be becoming numb to the headlines. Markets traded modestly lower the early part of last week on word that President Trump suggested waiting until after the election for a deal, though recovered mid-week as those fears faded. The primary move last week was in reaction to the payroll report on Friday. News over the weekend shows an increasing desire among Chinese officials to do a deal, as exports unexpectedly declined in November. Those who have avoided the temptation of trading the China trade war news have been rewarded, and there are likely many more highs and lows to come before a transformational deal is signed.
Despite equity markets delivering their best return since 2013 and the third-best year since the technology bubble, investors remain unconvinced. Investors have pulled a net $136 billion from equity funds and ETFs this year. Historically, strong markets have driven a rush into equities among retail investors, but this certainly has not been the case this year. This has been the trend through much of the current bull market, with steady outflows from equities and into bonds despite low yields. Part of this is demographics, but much is due to scar tissue from the past two difficult bear markets. This has impacted the psychology of not only those at or near retirement, but also the millennial generation, who are dramatically conservatively positioned.
Similar to how equity investors are tuning out the noise of the China trade deal, the Fed is fading as a trading catalyst. There is a an FOMC meeting this week, and it is getting little attention. The overwhelming likelihood is that there is no change to rates, but it will be interesting to hear the commentary about developments in the economy. Through next June, there is a 60% chance of no move, with a 40% chance of one or more cuts. By December, the odds of a cut rise to 65%.
What to Watch
A busy week awaits, including the U.K. election and scheduled tariff increase on Chinese imports. Economic data includes NFIB Small Business Index Tuesday, CPI on Wednesday, PPI on Thursday and retail sales on Friday. The Fed holds an FOMC meeting on Wednesday.
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