Wall Street managed a rally to close the week, even as market participants struggled to make heads or tails of the incessant headline hockey around the trade talks. Donald Trump was ambiguous on Friday, parroting the usual line about being “close” to a deal, while media reports suggested stumbling blocks remained.
Despite Friday’s gain, the S&P snapped its best weekly winning streak in two years, logging a small loss, the first down week since early October.
The S&P’s three-day losing streak on Tuesday, Wednesday and Thursday brought the first back-to-back declines for the gauge since October 8.
Even as equities’ weekly streak is no more, US stocks are still on track for a third consecutive monthly gain, and volatility has declined near record lows both at home and across the pond.
The S&P has fallen in only two months during 2019 – May and August, when Trump broke the Buenos Aires and Osaka trade truces, respectively.
Read more: One Word For Markets In 2019: ‘Breathtaking’
For what it’s worth, Credit Suisse is out warning that rebalancing flows could put downward pressure on stocks into month-end. Pension funds will need to sell nearly $7 billion of domestic equities thanks to the latest rally, the bank said, adding that “with month-end falling on the Friday after Thanksgiving, rebalancing funds may trade earlier, especially with next Tuesday being the MSCI Semi-Annual Review”.
The S&P is up more than 2% for the month, compared to a small loss for the Bloomberg Barclays US Aggregate Bond Index.
At the risk of stating something trivial, the fate of the rally now hinges on what Trump decides to do with the December 15 tariff escalation. On Friday, the president waffled on the Hong Kong bill, irritating Congress and inadvertently insulting Beijing in the process. China continues to warn of unspecified retaliation if the bill becomes law, which it will, one way or another (it’s got a veto-proof majority on the Hill).
Sources close to the White House this week said a delay of the December tariff escalation is all but certain, given that neither side really wants to see those planned levies take effect. And yet, Trump is not always a rational actor. He may decide to throw caution to the wind, even after being told (allegedly) that the Fed is not inclined to have his back next month barring a convincing deceleration in the data that would warrant another cut.
Through it all, the general macro narrative continues to revolve around the assumption of tariff relief and the avoidance of a crash-out Brexit scenario. As long as those assumptions hold, the pro-cyclical rotation that characterized the first couple of weeks in November may have some scope to run. As long as any accompanying bond selloff is led by rising breakevens (i.e., growth optimism) and not surging real rates, risk assets should do ok. Consider this from SocGen:
If we look at the Conference Board US Leading Economic Index, we see that the US has undergone three mini-cycles since the 2007 crisis. The announcement of ‘Phase 1’ agreement on the 11 October 2019 by President Trump, after 463 days of twists and turns between US/China was welcomed and came as a relief to the financial markets, lifting in a dramatic way the price of risky assets. In our view, market participants have started to factor-in the start of a fourth mini-cycle.
And yet, the bank still sees a mild US recession in 2020.
“Our S&P 500 forecasts have a V-shaped profile, factoring in two quarters of negative GDP growth in 2Q-3Q20, and the expectation of a 2021 economic recovery”, SocGen says, in their 2020 US equity outlook.
The problem is a lack of earnings growth. “From a price perspective, the lessons of previous mini-cycles could support a melt-up in the S&P 500 to 3,400 [but] we believe there will be a need for earnings to grow next year”, the bank writes. Profit growth flatlined in the third quarter, although that was actually a better result than the ~3% contraction consensus expected.
Ultimately, SocGen can’t bring themselves to rule out that melt-up scenario, which they say “is not outside the realm of possibility”.
After all, the bank says, “US consumer confidence and retail sales remain healthy for now, and [it’s] possible that a trade deal between US and China could put a floor under the current ‘manufacturing recession'”.
Both consumer sentiment and the Markit manufacturing PMI came in stronger than expected on Friday.
