Heading into the final two weeks of 2019, the S&P 500 had soared 28.5 percent, while a bond rally has pushed the yield on 10-year Treasury notes down more than three quarters of a percent. If such gains continue through New Years, it will mark the first time since 1998 when stocks have jumped by at least 20 percent while Treasury yields declined by an equal amount.
More importantly, The Santa Claus Rally has achieved lift off.
At this point, even the skeptical money has begun to find its way into the market. Especially as investors become unnerved by FOMO (fear of missing out), a psychological tendency that impacts human cognition when inundated with the idea of missing out on some positive occurrence or event. Three months ago, these same investors wanted nothing to do with equities. But, tidal flows change quickly. And who can blame them?
We have a strong economy. GDP rose by 2.1 percent in Q3, in line with the consensus and matching the prior quarter. We have the lowest unemployment rate in 50 years. Rising wages. Consumer spending. These represent the kind of fundamentals that should keep the bulls running into next year.
Accordingly, $43 billion has flown into equity funds the last six months, the best capital flows since March 2018. Confidence fueled by an improving global trade outlook and belief in the prospects for global growth.
Which explains why the S&P 500 recently crested above 3,200 for the first time.
The Federal Reserve's Open Market Committee (FOMC) concluded its two-day December 2019 meeting on December 11th. The biggest takeaway? The general acceptance in the reduced probability of a recession beginning over the next year, the odds of which currently stand at roughly five percent, according to economists we respect.
Love him or hate him, there's not denying that President Trump hit the Trade Trifecta last week.
First, House Speaker Nancy Pelosi took a brief break from the process aimed at removing Trump from office and agreed to pass the USMCA, the newly negotiated replacement for NAFTA. This deal will guarantee the continued flow of goods across the Mexican and Canadian borders.
Second, the United States and China reached a partial trade deal that will at least modestly deescalate the trade war raging between the world's two largest economies. For now, tariffs will remain in place, but the U.S. will not impose new ones scheduled for this month. Most importantly, both sides are moving closer to a real, lasting deal that will remove tariffs in place and establish true free trade.
And third, the election result across the Atlantic. Boris Johnson's Conservative Party won a landslide victory over the far-left socialist Labour Party of Jeremy Corbyn. Corbyn, the most anti-American party leader to contest for Britain's top post, placed anti-American scaremongering at the center of his campaign. His electoral defeat is good news for U.S. trade and foreign policy. But more importantly, Johnson's victory removes the final obstacle to Brexit, which means that Britain is open for business, while symbolizing an end to years of political infighting over Brexit, which is scheduled to occur on January 31st.
Regarding the Phase One China deal, this represents a good start. By no means, however, is it an endgame. A broader deal that confronts the important issues of intellectual property and greater Chinese market penetration still looms in the distance and remains the great prize. Still, getting some of this done before year end is very positive. Proving that both sides aspire to similar longterm aims and are capable of working together to achieve them.
Federal Reserve Vice Chairman Richard Clarida said it was too soon to judge how a limited agreement to halt the trade war between the U.S. and China would influence the economy, but any reduction in policy uncertainty is "obviously a positive for the economic outlook."
Clarida also added some color regarding concerns about softer consumer spending.
"The consumer is in great shape," he said, citing low unemployment, rising incomes and a high personal savings rate. "The consumer has never been in better shape in my professional career in aggregate."
Sticking with the economy, U.S. factory production rebounded strongly in November as auto industry output picked up after the General Motors strike ended. Industrial production, a measure of factory, mining and utility output, increased a seasonally adjusted 1.1 percent in November from the prior month. That's the biggest monthly increase since October 2017.
Above all things, the market dislikes uncertainty. So, anything that sweeps uncertainty from the landscape is helpful. Last week accomplished a lot in that regard. While it still must be signed and implemented, the China trade deal will remove a big headwind for the global economy. Additionally, markets will benefit by:
* The increased clarity provided by last week's UK vote in favor of Boris Johnson and Brexit
* The U.S., Mexico and Canada trade deal (USMCA) moving forward
* The Fed signaling it will take 2020 off by trying to leave rates where they sit
In aggregate, you can practically feel the weight of these big uncertainties being lifted from the shoulders of equity markets, bond markets, corporations and the global economy.
In the Middle East, Saudi Arabia held a trial for 11 people and sentenced five to death for the murder of dissident journalist Jamal Khashoggi inside the Saudi consulate in Istanbul last year. Mr. Khashoggi, a prominent journalist and critic of the kingdom's leadership, was killed by Saudi government agents in October 2018. Five people will be executed and another three will be imprisoned for 24 years for covering up the murder.
Finally, this represents a good time to consider the old adage in technical analysis, "The trend is your friend."
Right now, the trend is up. It's been a stellar year for stocks, bonds, real estate, crypto currencies and many other asset classes. We must remain invested to take advantage of the bull market. However, it becomes increasingly important that we not become complacent. That we maintain our downside protection parameters. While keeping a cast-iron gaze on our recency biases in case market conditions quickly change.
At some point, they will. Till then, these markets are providing substantive opportunities for those willing to seek out that worthwhile nexus between risk and reward.
2020 promises to be an exciting year for all market observers. Brexit. Global trade. The presidential election. And all of the other innumerable and unforeseen events that will transpire. Not all of it will make for smooth sailing. But we will be ready to navigate all seas the best we can.
More on our 2020 outlook in January. Till then, please enjoy a wonderful holiday season with family and friends. Merry Christmas and Happy New Year!