The headlines the morning of February 12, 2019, focused on a trade deal getting done with China and a border deal that would keep the government open.
The result? Stocks rallied 1%-1.5% and the S&P 500 Index traded above its 12-month moving average. Optimistic anticipation now requires real results to sustain the rally.
Source: Bloomberg
I’m working on a presentation for a meeting with a group of clients next week, tentatively titled “Crossroads.” From my perspective, it looks like the stock market is at a point where we can move upward based on the Fed’s newly found patience (and willingness to suspend further rate hikes), the possibility of a truce in the trade war with China, and an agreement on the Mexican standoff that will keep our government open for business.
Or not.
Global growth appears to be slowing. Corporate earnings estimates continue to be reduced, in part reflecting the waning effect the historic tax cuts had last year.
Consumer confidence looks like it may have rolled over.
For what it’s worth, the bond market doesn’t seem to be buying the stock market’s enthusiasm. After reaching the highest yields in five years, the 10-year U.S. Treasury has turned tail and is trading below its 12-month moving average.
Source: Bloomberg
The title “Crossroads” came to mind while I was pondering the coloring of the First Horizon Advisors Five Factor Framework. After recently having as many as four red lights on the dashboard, we are starting to see some positive changes. For example, Investor Sentiment got so bad it suggested the possibility of positive forward returns for the next few months (remember the Warren Buffett admonition to be greedy when others are fearful?); that light is green. Should the S&P 500 Index close at or above current levels (2743 at this writing), the Market Trend light would shift from red at the close of January 2019 to green. Both Credit Conditions and Valuations are showing yellow at the moment, which leaves only the Economic Growth light on red.
Most of what we discuss in this forum speaks to short- and intermediate-term trends. We set our investment policy based on long-term expectations and suggest asset allocations based on required returns in the context of investor risk tolerance. The short term outlook should not impact your long-term asset allocation.
Over the long term, equity returns have generally been higher than those generated by fixed income and cash. With the risk-free rate currently in the neighborhood of 2.7% and assuming an equity risk premium of 4%, a good bet for the return over the next ten years would be something like 6.7% (this is no guarantee, of course, and is merely a formulaic assessment; past performance is not an indication of future results. Equity investments are risky by their nature and it is entirely possible to lose money in the stock market over any given ten-year period.)
Which road will the economy and the markets take?
We never know until we arrive -- weeks, months, most likely years later. Buckle up and enjoy the ride.
The S&P 500 is not managed and you cannot invest directly in the index. This information is for illustrative purposes only.
