Momentum Building

In continuation of the recent market strength, the S&P 500 closed the week at another record high. Growing optimism around a constructive “phase 1” trade deal and a string of better than expected economic data points have stocks marching north at a steady pace. U.S. equities are not alone, however. Europe, Japan, and a number of emerging markets, including China, have all turned higher in recent weeks. Thawing trade tensions and more accommodative fiscal policies and central banks have helped put a bottom in the global slowdown narrative. The rally has been impressive and there is little from a technical standpoint to suggest it should cease any time soon. We’re moving into a historically strong stretch of the calendar, the sentiment is not overly optimistic, breadth has expanded, and cyclical leadership has re-emerged. We’re on solid footing going forward. 

As we’ve said in recent weeks, the greatest risk to current strength in the equity market is a sudden collapse in trade negotiations. This week, however, reports came out indicating that existing tariffs could even be rolled back as part of a “phase 1” deal. President Trump has not committed to this yet, but the market is now considering it a possibility. As such, we’ve seen the deep cyclicals breaking definitively higher. Industrials, tech, and materials all had impressive breakouts this week. In the bond market, treasury yields are also confirming the more optimistic economic tone. The U.S. 10 year yield is pushing back towards the 2% level after touching 1.44% just a few months ago. Banks are racing higher as a result. On the flip side, utilities, REITS, and staples have all started to weaken. This change in leadership is good to see and is necessary for a durable rally. Trade is on a better track for the moment, but until the ink hits the paper, uncertainty ultimately remains. 

Speaking of uncertainty, we are now a little under a year away from the 2020 election. Markets are generally focused on trade and the liquidity being pumped in by central banks, but the political influence is slowly growing in the background. In particular, we’ve been paying attention to the impact changes in polling and betting odds have had on the health care sector. A good number of health care stocks have been moving more or less on the odds of Elizabeth Warren winning the Democratic nomination. Lately, Warren has been sliding as pushback on some of her policies from the Democratic establishment and a number of corporate leaders grows. In turn, health care names have improved. As the year goes on, we expect this kind of influence could broaden out to other sectors and even specific companies as more proposals get thrown out and odds change. Winners and losers will emerge and we will be paying close attention to sniff out risks and opportunities.