Sometimes no news is good news
As we prepare cautiously for the dog days of August, the S&P 500 stands on the threshold of our full-year 3,100 forecast. That seemed a tad optimistic when it appeared as the high number in the Barron’s 2019 Outlook. Yet as breathtaking as the 20%-plus rise has been off the panicky, oversold December 24 lows, I’d like to remind readers again that we really haven’t moved all that much off the market’s 2018 high set less than 11 months ago. In fact, we are up just 3% from those levels. With that in mind, it seems to us—sorry bears—that all the market needs to grind higher from here is no news. And we think, generally, that’s what it’s likely to get.
Let’s quickly review where we are on the key news topics that many thought would undo us by now.
Global Economy: Stabilizing As we entered 2019, the prevailing view was that some combination of Fed/global central bank tightening and the China trade war was about to end the expansionary cycle, with a recession waiting in the batter’s box. Currently, the recession camp has gone radio silent. Although the data globally is not completely consistent, like any soft landing, many forward indicators are showing signs of stabilizing, including last week’s durable goods orders, a variety of Institute of Supply Managemet (ISM) indicators and confidence numbers. Second quarter U.S. gross domestic product may be off its torrid pace of a year ago, but came in at a solid at 2.1%. Importantly, a core driver of forward GDP, consumer spending, was better than that. So the soft patch of winter is proving to be just that, implying better news ahead. Unless we suddenly get a dramatic lurch downward—unlikely given now-supportive global central banks—the global economy should enter a new, perhaps modest, expansionary phase. That’s a positive.
Corporate Earning: Stabilizing Again, the bear case as we entered 2019 was that companies would not be able to hang onto the sharp 20% rise in earnings from 2018, largely because it was due to the “sugar high” of government stimulus. So much for sugar highs. As we’ve argued all along, corporate tax reforms passed in late 2017 seem to be having secondary legs. So far this earnings season we’ve not only hung on to last year’s big gains, but unexpectedly have modestly grown earnings modestly over and above them. With half the S&P 500 having reported, earnings are actually up 4.5% year over year, not down, as expected. Again, not great but a positive relative to depressed expectations. And as 2019 progresses, the year-over-year comparisons get easier.
Trade Wars: Stabilizing (We hope.) By now, according to the bears, we should have been in a full- blown reenactment of the 1930’s Smoot-Hawley trade wars that deepened and prolonged the Great Depression. Low and behold, reason has prevailed. There is modest progress here and there, along with a truce of sorts with China. In the meantime, companies are re-routing their supply chains to adjust. Net-net, not great but stable. We are not taking our eye off this ball quite yet, however. For instance, if the Hong Kong demonstrations get worse and Beijing miscalculates, employing more violent means to halt them, that could lead to additional pressure on President Trump to counter with an even tougher stance on the trade negotiations. We’ll see. For now, no news would definitely be market friendly.
Brexit: Stabilizing, sort of With Boris Johnson now at the helm, market consensus is slowly moving toward the view that a hard Brexit is coming to a theatre near you this fall. (On Halloween night, to be precise.) This is probably short-term disruptive, long-term positive for the U.K., but the rest of the world seems to be adapting. Companies have had three years to prepare, and most tell us they’re ready. World GDP might take a modest hit, but on our numbers, the downside is probably 0.1% off global GDP for a short time. And part of me wonders if this is not a replay of a previous global Armageddon event that never happened, Y2K. In any case, what markets hate most is uncertainty, and with Johnson now the U.K. prime minister, that uncertainty has declined.
2020 Election Cycle A final risk as we entered 2019 was heightened concern that the favorable economic policies of the Trump Administration (especially the earnings-enhancing corporate tax cuts and deregulatory campaign) could be reversed following the 2020 elections. Mueller’s probe was in full gear and the Democrats had just won back the House. While this risk will continue to feed the market’s wall of worry through next fall, the events of summer have certainly caused them to stop getting worse. The Russia probe and impeachment-to-follow fear died last week during Mueller’s bland and detached testimony before Congress. The Democratic debates and the candidates internal competition to out-do one another with socialist-sounding giveaways make it clear that the 2020 election is coming down to a fight between a socialist-leaning candidate and a capitalist-leaning one. It’s harder and harder to see the capitalist losing when the economy is doing so well. Predictably, the President’s approval ratings are rising in the polls. Whatever you think of his tweets no news here is probably market friendly.
Our "No News is Good News" Call At Federated, our PRISM® committee has been gradually taking profits on our outsized equity overweight set in the cold dark days of December 2018, and we are now down to “just” a recommended 30% overweight to stocks. In all likelihood, we’ll stay there through the year absent an unexpected pullback that presents us with an attractive opportunity to reload. That said, we are sticking for now to our long-standing 3,100 forecast on the S&P 500, a mere 2.6% away. Our expectation is that from now through the end of 2019, we will see an increased focus on sector rotation and stock picking, which generally favors our bottom-up-driven investment processes. We’ll see. In the meantime, we’re expecting little in the way of news. And sometimes, that’s a good thing.