In another impressive advance, the S&P 500 picked up over 2% this week and closed at another record high. Spurred by a signed trade deal with China, the passing of the USMCA in the Senate, improving economic data at home and abroad, and a solid start to the Q4 earnings season, markets are feeling confident. There is no denying that we are working off of an increasingly strong foundation. However, the risk in the short-term remains that market sentiment is headed towards more extreme levels. Equity ETF flows are above the 95th percentile, put/call ratios are near the 5th percentile, and Treasury bond ETF flows are near the 5th percentile as well. These conditions have historically led to market pullbacks. It’s important to note, however, that technical trends are well intact, credit conditions are holding up well, and liquidity is ample. So while a correction wouldn’t be unlikely, we’d view it more as a buying opportunity. This is especially true given the real fundamental improvement we’ve seen.
On Wednesday, President Trump signed the “Phase 1” trade agreement with China. Among other things, this agreement addressed intellectual property theft, ended the practice of forced technology transfers, expanded Chinese purchase agreements for U.S. goods (mainly agriculture), opened investment barriers to U.S. financial service providers, and addressed unfair currency practices. Only time will tell how this agreement will play out, but the important thing is that relations are on the mend and companies now have greater clarity because of that. The USMCA moving forward also adds to this sentiment. We’ll continue to see how these companies address the new trade deal as the earnings season progresses.
Speaking of earnings, a number of solid reports from the banks got us off to a hot start. Of note, JP Morgan posted an impressive earnings beat that highlighted the strength of the consumer. Auto loan, home loan, and card loan growth show that consumers at America’s largest bank are doing well. This is particularly impressive against the backdrop of still pristine credit quality. The strength in the consumer continues to show up in the macro data as well. Retail sales in December advanced 5% year-over-year and November’s numbers were revised higher to boot. Over two thirds of the U.S. economy is rolling right along.
On the global front, we continue to see signs of improvement. Global LEIs are recovering, soft and hard data out of Europe is getting better, sentiment is improving in Japan, and China should continue to improve with the trade truce and further stimulus. This improvement is being reflected in commodities and thus transports. We had a Dow Theory confirmation this week. Dow Transports and the Dow 30 each made a new high this week. This is a bullish signal.
The strength in the economy and the markets is also flowing through to the political arena. With the trade deal in place, betting markets have been increasing President Trump’s odds for re-election. You could argue this is having a feedback effect in pushing markets even higher on the expectation of 4 more years of a pro-business environment. Our friends at Strategas Research Partners have been quick to point out that market expectations about a Trump victory are perhaps overly optimistic. Any hiccup in Trump’s re-election bid could be a catalyst for consolidation. We’ll be watching over the coming weeks as we move into a stretch of the electoral calendar that has been historically weaker for stocks.
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S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.