Trade deals, Brexit clarity and a Fed hold cap a bullish end to the year.
As we sit here with just a few trading weeks left in the year, the bears’ hope for a late Christmas gift of something going wrong instead became a wall of dominoes dropping on them. I wish I could tell you I’m sorry, but I’m not. We’ve been warning the pessimists for some time that from our viewpoint, the odds were high we’d close to the north of our 3,100 year-end target on the S&P 500, and now we’ve made substantial early ground on our 3,500 forecast for 2020. That optimistic outlook for next year, which seemed like news when I first mentioned it on national television in November, looks more attainable if not unremarkable today. More on 2020 later; let’s summarize what’s happened as four big dominoes fell in the days before the holiday break.
- Trade truce with China Although there were many skeptics, our call has been that Presidents Xi and Trump had enough of their trade war for now. China needs a boost going into next year to get its economy back on track, and Trump has an election to win and needs continued growth at home to do it. I’m sure they’ll get back to fighting about unfair Chinese government policies on intellectual property theft enforcement, cross subsidies and generally less open domestic markets … after the election. Bottom line, trade worries are receding rather than increasing, a directional shift that’s key to which way confidence and economic activity head from here. The biggest domino falls first.
- Brexit course much clearer Boris Johnson’s dramatic win couldn’t have been better for those bullish on the global and European economies and markets. When I was in London for meetings in early December, most business people I met just wanted to know the direction forward but were worried Johnson’s margin of victory might not give him a large enough majority in Parliament to get a sound deal done. That concern now has fallen. With his crushing victory over Labor, the prime minister can deliver on Brexit without having to pacify his Northern Irish wing and/or the hardest Brexit elements within the Tory coalition. Given the size of Johnson’s majority, markets can rest assured the prime minister has sufficient negotiating flexibility to develop a deal good for both sides of the English Channel. A second domino of global uncertainty falls, right on cue.
- The Fed takes itself off the table Incredibly, this domino also dropped on the entrance of the bears’ cave the same week as the trade truce and British election. After leaving rates unchanged at its December meeting, Fed Chair Powell took any action on rates in 2020 off the table. This was no surprise to us, as we thought Powell could not credibly shift course a third time in 12 months without even his supporters wondering if he’d become unglued. Markets can now cheer that yet another potential risk, Fed tightening, is off the table. Green flag on the racetrack for risk assets. Another domino down.
- Congress signs off on the USMCA trade deal With their impeachment exercise trailing off to a weak ending, Nancy Pelosi’s House moved on to the revised Nafta deal negotiated months earlier by President Trump. What? Did you say they signed off? Remind me, how big of a trading partner for the U.S. are Canada and Mexico? ( FYI: Year-to-date through September, Canada and Mexico were virtually tied for first place, with China coming in third). What, bigger than China? When did you say this happened? This week? You must be kidding! Run for the hills, little bear cubs! Run!
As all of this played out, earnings forecasts continued to hold up and are more likely to move higher, not lower, from here. So the dominoes, big and small, have fallen. Hopefully, most of the bears made it into their warm caves for the winter before these dominoes blocked their entrance. If they’ve been keeping up with our market memos, surely they have! The rest of us are comfortably overweight equities. Next stop: 3,500. And if you see a lonely bear or two out there, give him or her a holiday hug. They’ve had a rough year.