Last December, almost 12 months ago, I set our year-end 2019 target for the S&P 500 at 3,100 (20% -25%). Look at valuations suggested the market had plenty of room to run. Now, with six weeks to go until year-end, the stock market has already closed above our initial target. As of Friday, the S&P is up 24.5% year-to-date, and up 32.7% since its Christmas Eve low. And that’s without including dividends. I was so confident there wouldn’t be a recession - and that the market was still cheap - that I raised our target to 3,250 in the middle of 2019. That’s only 4.2% above last Friday’s close.
With one possible (and very unlikely) exception, nothing we see on the horizon suggests the bull market is nearing an end. We’re forecasting moderate economic growth for the foreseeable future and see continued corporate profit growth as margins stay high. Monetary policy is not tight, far from it, and we don’t see any hikes to short-term interest rates through at least 2020.
Corporate America is still adapting to a much more favorable tax environment. And trade policy is more likely to get better going forward, rather than worse. The “new NAFTA” looks likely to pass by early next year, in part because as the Democrats target President Trump with impeachment, it becomes more important for them to reach some bipartisan goals.
House Speaker Nancy Pelosi recently described a political deal on the trade pact as “imminent.” Mexico and Canada are the US’s #1 and #2 trading partners. A deal with #4, Japan, is being worked out and is already benefiting the US. Meanwhile, news reports suggest a deal with China (#3) is approaching.
Want more reasons for optimism? The ball and chain of regulation continues to ease around the ankles of entrepreneurs. And a surge in the appointment of federal judges who believe in legislation, not administrative regulation, will make it tougher for the administrative state to hamstring innovation. In addition, consumers have plenty of purchasing power, both from wage growth and relatively low financial obligations.
Homebuilders still need to raise the pace of construction just to keep up with population growth and the scrappage of homes (including voluntary knock-downs, fires, floods, tornadoes, and hurricanes). Notice, too, that the US isn’t alone in the stock market rally. The Euro Stoxx 50 is up 19.4% in dollar terms so far this year (as of the Friday close) while Japan’s Nikkei is up 18.2%. We think those gains, at least in part, reflect investors looking ahead and expecting better policies.
By cutting tax rates and regulation, the US has become more competitive. Eventually, the political pressure on other countries is to follow suit. When Reagan and Thatcher cut tax rates in the 1980s, many other countries took the cue, which led to a global boom. One thing that could throw a monkey wrench into the bull market would be a shift by voters toward less growth-oriented policies and more government spending, expanded entitlements, and higher tax rates. This would take a sweep of the White House, House, and Senate with politicians willing to pass the votes.
Actually, I put the odds of that happening at roughly 5%. We know investors are worried about this, but it’s way too early - and way too unlikely - to change investment strategies at this point. Think about it: if a sweep like this would cut the stock market by 25%, but has only a 5% chance of occurring, that’s a drag of only 1.25% on the market (5% of 25%). A year ago, we were in the distinct minority in remaining bullish while so many were predicting the supposed “sugar high” was over and a bear market had begun. We didn’t see it that way then, and we still don’t see it that way now. Stocks are still cheap, the economy is not slipping into recession. The policy environment is tilted more toward growth than it was three years ago, even though it could be better. And that means the bull market should continue. Time to concentrate on the holidays.
Equities: Mixed performance was seen on the four major US indexes last week as the Russell 2000 moved lower while the other three indexes posted gains. With Monday being Veterans Day, it was not surprising to see that overall weekly volume was very low, at about 70 percent of average weekly volume. The return of the Dow is a little misleading as about half of the weekly gain came from Boeing alone as the stock has a 9 percent weighting in the index and it was up almost 6 percent last week.
○ Dow (1.17%) – Below Average volume
○ S&P 500 (0.89%) – Below Average volume
○ NASDAQ (0.77%) – Below Average volume
○ Russell 2000 (-0.15%) – Below Average volume