Such a long list, but room for one more

Before we gear up for the Christmas shopping sprint—Thanksgiving is as late as it can be—what can investors be thankful for? The answer is pretty obvious, as equity market gauges continue to flirt with new highs. Might we be due for a pullback? A number of Strategas Research’s proprietary tactical indicators do show the market overbought. But it notes overbought conditions in uptrends tend to be indicative of better-than-average future returns and durable advances. Seasonality is favorable—the final six weeks of the year historically have represented a tailwind for performance—as is low volatility, which tends to be an exclusive feature of bull markets. The S&P 500’s average daily range over the last month falls in the 5th percentile of all historical observations. Finally, data back to 1982 says mid-cycle adjustments as represented by this year’s three Fed rate cuts has tended to see strong near-term performance—up 14% within the next couple of months after the last cut, which was Oct. 30 this year.

Popular Q4 GDP estimates tracking at around 0.5% annualized arguably are overstating weakness in our economy—the market sure is ignoring them. Trend growth still looks to be closer to 2%, according to Renaissance Macro, with final domestic demand (GDP net of trade and inventories, and historically a better read on the economic outlook than GDP itself) running closer to 1.5%. This morning’s upward revision to Q3 GDP (more below) suggests the broader economy is better than headlines suggest, and several November surveys point to healthier growth, led by a 6-month high in Markit’s initial take on manufacturing. Also, with stock and housing prices making new highs, consumer net worth is on track to jump nearly 11% year-over-year (y/y) in Q4. (Likely) subsequent increases in spending over the next six months could help support real 2020 GDP growth of 2.5% or higher, Evercore ISI says. (Federated’s forecast is for 2.4% growth.) Clearly after this year’s earnings growth slowdown to near zero, investors are starting to price in better earnings in the year ahead. 2019’s deceleration mostly was attributable to tough y/y comparisons to a 2018 that was goosed by Trump’s tax cuts and higher energy earnings. This means earnings comps next year should be easier, with the Street currently projecting S&P operating earnings to rise more than 9% in 2020. (Federated’s projection is an 8% increase.)

There’s a lot of stimulus to support markets going into the New Year. After cutting rates three times over the past four months (July 30, Sept. 18 and Oct. 30), the Fed is unlikely to hike rates again until February 2021, if history is a guide. (Federated sees no rate hikes next year.) Since the 1980s, the average length of time between the first rate cut and the next Fed hike is 571 days. Central banks elsewhere have been equally if not more stimulative, and fiscal policymakers across Europe and Asia are laying out plans to spend more, too. Abetted by the Fed’s QE-lite, money supply growth is on a tear, with 3-month annualized growth topping 9%! Don’t fight the Fed or your relatives this Thanksgiving! If there is a concern, it’s that breadth confirmation is lacking in this latest move to new highs. One sign: the equal-weighted MSCI All Country World Index has continued to underperform the cap-weighted benchmark, which has been propped up by the heavyweights to an increasing extent. The top 40 now account for 28% of the ACWI market cap, the highest in more than 10 years, with the top 10 now 13% of market cap. Perhaps FOMO (fear of missing out) reaches for the large caps first? Small caps have been the slowest to reach old highs, but the Russell 2000 this week moved to a new 52-week high for the first time in more than a year—in 10 of the last 11 times this occurred, the market has posted stellar performance 12 months out. Yes, my list is long, but online shopping makes elf work a breeze. As old marrieds, the Mister and I have agreed not to exchange gifts this year. No problem. I’ve added me to my list! Blessings to you and your family this Thanksgiving.

Positives

• Homes are getting hard to find Boosted by low mortgage rates and a strong labor market, new home sales are rapidly accelerating, up nearly 32% y/y in October. Lean supply relative to sales could encourage more activity among builders, which is needed: while still up 4.4% y/y, October pending home sales slipped on a worsening housing shortage, the National Association of Realtors said.
• Santa better get busy Although it slipped again in November, Conference Board consumer confidence remains elevated and consistent with expectations for a solid but short (only 28 shopping days left!) holiday sales season. The take on last Friday’s final read on Michigan sentiment was similar as it rose to a 4-month high, while October’s consumer spending reflected momentum, up an eighth straight month.
• Q4 could get a lift from … trade? October’s trade gap narrowed much more than expected as imports declined much faster than exports. The result: real net exports could boost real Q4 GDP by eight-tenths of a point, if trends hold, helping offset some of the dour forecasts. This morning’s revised take on Q3 GDP was bumped up to 2.1%, partly on upward revisions to business investment.

Negatives

• Freighters frustrated The Case Freight gauge fell 5.9% y/y in October, near its fastest pace of decline since November 2009, while the y/y Freight Transportation Services survey dropped in September for the first time in three years. The decline in shipments coincides with the 1-2 punch of slowing global growth and a trade war, which together were blamed for October’s biggest y/y drop in industrial production in three years. That could change in the months ahead, as October's durable goods orders unexpectedly rebounded, with the business investment component up 1.2%.
• Economic weakness spreads The number of states reporting slower growth hit 10 in October, lowering the overall growth trend in the Philly Fed’s coincident indexes measuring activity across states to near a 10-year low. The data confirm the U.S. entered Q4 on a weak note, although Ned Davis Research’s related recession probability model said recession odds remain slim.
• Get used to trillion-dollar deficits as far as the eye can see The first month of the new fiscal year has the U.S. on pace to easily blow past the $1 trillion-deficit benchmark, which it was $16 billion short of hitting in fiscal 2019.

What else

Happy Thanksgiving! Virtually every inflation reading is reflecting a slowdown, including global trade prices and this morning’s report on the core PCE, which rose a below-consensus 1.6% y/y. This is good news for Thanksgiving cooks, as it’s estimated the traditional dinner will cost $48.91 this year, basically unchanged from last year.

We are about to find out if Bloomberg's money can beat these odds Ever since Al Gore in 2000, every Democratic candidate who has won the Iowa caucus has won the Democratic nomination. Momentum that comes out of winning early states can be hard to stop, with candidates who put little energy into them becoming largely irrelevant by the time Super Tuesday rolls around.

Time once mattered more than speed Each of the seven “Lincoln-Douglas” debates of 1858 lasted three hours under a structure that would be unrecognizable to voters watching this year’s Democratic debate candidates get 1 minute and 15 seconds for direct responses to questions and 45 seconds for rebuttals. In the contest for Illinois’ U.S. Senate seat between challenger Abraham Lincoln and incumbent Stephen A. Douglas, a candidate would speak for 60 minutes, the other candidate would speak for 90 minutes, and then the first candidate was allowed 30 minutes for rebuttal!

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