More money managers are feeling less bullish, but you sure couldn’t tell by the performance of U.S. stock markets last week.
So far, 2019 has been a tremendous year for U.S. stocks. Through the end of last week, the Standard & Poor’s 500 Index had gained more than 20 percent year-to-date, the Dow Jones Industrial Index was up more than 15 percent, and the Nasdaq Composite had risen more than 24 percent.
All three indices finished last week in positive territory. Lawrence Strauss of Barron’s reported signs that global markets are stabilizing supported investors’ optimism. In addition, yields on 10-year U.S. Treasury notes increased, which suggested “investors are more optimistic about growth and overall economic prospects.”
Despite strength in U.S. markets year-to-date, Barron’s most recent Big Money Poll found fewer money managers are bullish than just one year ago when 56 percent anticipated gains in the months ahead. When 134 money managers across the United States were asked about their outlook for the next 12 months:
That’s the lowest level of bullishness in 20 years and the highest level of bearishness since the mid-1990s.
Barron’s reported there could be a variety of reasons for the change in attitude, including high valuations, an uncertain economic outlook, or the divisive political environment.
One money manager commented, “There are so many different headlines to watch right now…Brexit, trade, the economy, elections. Trying to predict them all correctly is like trying to predict what the weather will be like in November 2020. We might get things directionally correct, but getting them exactly right is a matter of luck more than skill.”
Last week was like an overstuffed suitcase that busts open on the baggage carousel. A lot was unpacked in a surprising and disorderly fashion.
There was some positive news for investors who prioritize fundamentals. Third quarter’s earnings season – the period of time when companies let investors know how they performed during the previous quarter – got off to a strong start.
Fifteen percent of companies in the Standard & Poor’s 500 Index have reported so far and 84 percent had earnings that beat analysts’ expectations. FactSet said better than expected earnings from companies in the Healthcare and Financials sectors balanced the weaker performance of companies in the Energy sector.
There was some negative economic news, too.
In the United States, retail sales declined in September. It was the first monthly decline since February, reported MarketWatch, and analysts had expected an increase.
In China, gross domestic product growth was 6 percent year-over-year, the slowest growth rate since the 1990s, reported Reuters.
On the geopolitical front, The Wall Street Journal reported U.S. and European investors were cheered by news that Britain and the European Union (EU) had reached an agreement under which Britain could amicably exit the EU. That optimism was dashed on Saturday when Parliament withheld approval of the deal until all supporting legislation has been passed, reported The Washington Post.
The world was also rocked by Turkey’s invasion of Syria.
At the end of the week, the Standard & Poor’s 500 Index and Nasdaq Composite had held onto gains while the Dow Jones Industrials finished lower.
The world breathed a sigh of relief last week when the United States and China took a step toward a trade-war truce.
Financial Times reported the United States agreed to not increase tariffs from 25 percent to 30 percent on $250 billion of Chinese imports next week. (Current tariffs remain in place, and it is possible new tariffs will be imposed on additional Chinese goods – electronics, apparel, and other consumer items – in mid-December.)
In return, China agreed to purchase $40 to $50 billion of agricultural goods, including soybeans and pork, although no time frame was established for the purchases. It remained unclear what progress was made on intellectual-property protection and rules to prevent currency manipulation, reported The Wall Street Journal (WSJ).
U.S. stock markets responded enthusiastically to news about one of the great uncertainties hanging over economic growth, namely the trade war between the United States and China, might be resolved. However, after the details of the deal were announced, markets gave back some gains.
“The tentative truce underwhelmed some international businesses that had been hoping the United States and China would finish up a deal that cemented more sweeping structural changes in China’s economy, eliminated additional tariffs scheduled to go into place in December, and even rolled back existing tariffs both sides have added to imports from each country,” reported WSJ.
Derek Scissors, an American Enterprise Institute trade expert and White House advisor told WSJ, “If this turns out to be all there is, we could have achieved these results a year ago or more.”
Yields on U.S. Treasury bonds moved higher during the week, and the yield curve righted itself, reported MarketWatch. The change reflected optimism about trade negotiations. Bond markets also embraced a Federal Reserve announcement it will resume buying Treasuries each month to ensure the banking system has sufficient reserves.
The United States and China hope to have a written draft of the phase-one agreement finalized during the next few weeks.
From trade wars to impeachment inquiries, investors had a lot to ponder during the third quarter. Toward the end of September, they appeared to become more cautious, although it’s difficult to say which issues weighed most heavily. Here are a few questions they may have been asking:
Is recession looming closer?
While there are signs of slower economic growth – including last week’s weakening economic data – the chance of the economy moving into a recession during the next 12 months remained relatively low, according to the New York Federal Reserve. It put the probability of recession by August 2020 at 38 percent. In other words, the likelihood there would not be a recession was 62 percent.
“We would recommend a little less focus on the ‘recession on/off’ debate and position on a slowdown thesis,” suggested a research director cited by Barron’s.
Will the United States-China trade war end?
The ongoing and escalating trade war with China created an environment of uncertainty for American businesses during the third quarter of 2019. Lack of clarity could slow economic growth. The Economist reported,
“In boardrooms across America, business people are scrambling to assess the impact of the latest escalation in the commercial confrontation between the two superpowers…Most companies make plans over a five- to ten-year horizon and invest in assets with a life of 10-20 years. But with each new tariff announcement, the rules for trading their products become less stable.”
Investors remain concerned about the potential impact of trade on global growth, too. Last week, the World Trade Organization downgraded its forecast for global trade growth in 2019 and 2020, reported the Washington Post.
How much risk do I want to take?
The prospect of slower growth at home and abroad appears to have affected investors’ appetite for risk. This was apparent late in the third quarter when some highly anticipated initial public offerings (IPOs) were delayed. (IPOs occur when private companies offer shares of stock to the public.)  Yahoo!Finance explained,
“…the recent IPO run is telling us that retail investors (you, a regular person) and institutional investors…are becoming less interested in taking on that risk. If it was once appealing to buy shares in a hot tech name that isn’t yet making money and won’t necessarily make money for a long time, it isn’t very appealing anymore.”
What is the bond market trying to tell us?
Around the world, about $17 trillion worth of bonds are offering negative yields. The number grew by $3.1 trillion in August, reported the Financial Times (FT). Governments in Europe and Japan are the primary issuers of bonds offering yields below zero. However about $1 trillion of corporate bonds have negative yields, too.”
“US dollar-denominated debt accounts for roughly 90 percent of all bonds that still have a positive yield, according to Bank of America,” wrote FT, which also pointed out that real Treasury yields, which are yields minus inflation, have edged into negative territory.
Will the impeachment inquiry affect stock markets?
The impeachment inquiry is unlikely to overshadow key economic indicators, but it increases uncertainty and that won’t help companies or investors. Yahoo!Finance cited strategists at JP Morgan Chase who wrote,
“Despite the drama this process will inject into the rest of the President's first term, there is little justification for altering asset allocation now, unless one thinks that this issue is the decisive one that tips the US economy into sub-trend growth and/or a profits recession…To us, impeachment more seems yet another constraint on returns over the next year, given the newer uncertainties created around international and domestic policy.”
You know what they say: Markets hate uncertainty. As a result, markets may remain volatile for some time.