After a week of making new highs, the market might be entering “maintenance” mode going into the weekend.
Optimism around trade has waned a little, so holding close to the flat line today might be a victory. With stocks at these levels, no one should get too worked up if they don’t continue to rocket every day. It’s actually kind of healthy if they don’t. The idea is just to not get banged up.
Let’s put things into perspective: The latest trade headlines aren’t as positive, and the S&P 500 (SPX) is down just three points in pre-market trading. That reflects real strength. Another overlooked story this week that plays into the optimism theory is gold being down 4%. Interest rates are up and people don’t seem to be as worried about the economy, so those two things are working against gold.
The pullback in stocks toward the end of the day Thursday and into Friday morning came after Reuters reported that there’s “fierce resistance” in the White House to rolling back tariffs on China. Then a top trade adviser told the media that only President Trump could decide to remove tariffs and there’s no agreement to at this time.
The chance of getting tariffs removed, as media reports discussed earlier Thursday before that negative Reuters headline, is much more optimistic than anything we’ve heard in quite a while. Giving up tariffs—instead of just freezing them as some people thought might happen—would be more positive because it possibly means commerce could actually pick up. If you freeze tariffs but don’t get rid of them, they’re still in the way.
Despite some of the enthusiasm we saw earlier this week, it’s still too early to get optimistic about the trade war training wheels coming off the market. Nothing is for certain until signatures are on paper. The S&P 500 Index (SPX) might have extended its run above 3000, but until something solid comes out on a deal between the U.S. and China, it might be prudent to be very careful about assuming everything is great. It’s not an easy road to get to a trade deal, as the last two years have shown.
For once, the action is in bonds.
Higher yields became the big story as the week rolled on and Treasuries got slammed. That was definitely the case Thursday when the 10-year Treasury yield easily sliced through the 1.9% level where many analysts had seen resistance and pushed all the way to an intraday high of 1.96% before easing a bit. The next psychological and technical resistance level is probably right around 2%, a point the 10-year yield hasn’t touched in more than three months.
The rate picture sure has done an about-face quickly. Just a few weeks ago, a lot of headlines were talking about the chances of a recession, and the yield fell below 1.6%. Now the SPX has zoomed straight up for a lot of October and the beginning of November on trade hopes, and yields are on a roll.
Financials might owe some of their solid performance this week to the yield picture. The days of an inverted curve possibly hurting bank profits seem like a long time ago. The 10-year yield now enjoys a 25-basis point lead over the two-year yield, the highest level since early this year.
At the same time, pressure on Utilities, Real Estate, and some other so-called “bond proxy” sectors is mounting. These sectors tend to get hurt when Treasury yields rise, because some investors might think they can get close to the same yield from fixed income investments as they would from dividends.
With stocks making new record highs almost every day, yields on the move, and economic data still looking decent, how’s the consumer feeling? We’ll get a sense of that later this morning with the University of Michigan’s preliminary sentiment report for November. Headline consensus is 95, according to Briefing.com, down slightly from 95.5 in October. Last month’s report showed consumers feeling good about income and jobs growth but nervous about tariffs and Washington politics.
Yesterday we talked about how some analysts are getting worried about where stocks go from here because of earnings expectations sliding for next quarter. At the same time, it’s important to remember that a large number of companies raised their outlooks this earnings season, so it’s uncertain if everyone is fully factoring that in.
Another concern is the current SPX valuation being above 20 on a trailing price-to earnings (P/E) basis. Levels above 20 sometimes make people nervous, and this quick rally has really turned some heads. The forward price-to-earnings is still near 18, however, not too far above historic averages.
That forward P/E level could be an important number to watch over coming weeks as analysts continue to work on earnings estimates for Q4 and 2020. If it starts climbing, maybe there’s cause for concern about valuation. If it stays about where it is, it might indicate that those improved company outlooks are getting factored in.
It’s all going to be interesting to watch as we count down toward the end of the year and move through the heart of retail earnings starting next week.