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| While the fundamentals driving the market appear solid, the rally is largely driven by optimism for US-China trade negotiations |
Well, that was quick! November arrived and then disappeared, leaving many American investors with leftover roast turkey, cornbread dressing, and a few small pieces of pumpkin pie. And why shouldn’t American investors celebrate a bit? The November chart is quite beautiful outside of a few minor hiccups, with the S&P 500 moving steadily higher from the bottom-left at the beginning of the month to the top right of the chart by the end. This is the boring way that markets are supposed to work! For a few dry details, the S&P 500 is up about 3.4% for the month, lagging both the Russell 2000 (up 4.0%) and the Nasdaq (up 4.5%) for the same period.
The steady advance of equities comes on the back of the same tailwinds that drove October’s rally (read a more detailed breakdown of the drivers and risks to the rally in the previous post). The drivers continue to be:
- Expectations of at least another trade détente between the US and China.
- Decent economic data coming out of the USA (US third quarter GDP estimates are solid; Black Friday sales look good at above $7 billion according to Adobe Analytics – they also have some fun charts and info on holiday shopping trends on their website).
- Relatively solid company earnings – as evidenced by recent third quarter results
- A more tempered approach to interest rates by the Fed.
Please note that not all stocks are benefiting equally from the recent market moves. Tech, Health Care, and Financials companies have outperformed the rest of the market by a wide margin, with Industrials and Communications following closely behind. Retail companies (part of the Discretionary sector) constantly find themselves caught in the powerful winds of US-China trade negotiation rumors, buffeted too and fro as the narrative of an upcoming détente or tranche of tariffs alternatively gains favor with investors.
Market Sensitivity and Complacency
While the rally drivers remain solid, markets have shown a remarkable willingness to react to market news, with the slightest rumor or report sending the intraday market sharply higher or lower. The Ignorant Investor simply has observed this in his daily routine of watching the markets. Never has the news cycle been more important for traders!
Equities have also marched higher with remarkable complacency on an assumed Phase 1 trade deal for which both the terms and the time at which the deal is struck remain nebulous at best (first the deal was to be signed in November, then moved to December). During that time, the US also put forward legislation supporting Hong Kong protestors. And throughout all this time, that arbitrary deadline of December 15th after which new US tariffs are scheduled to hit Chinese goods is still fast approaching.
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Other Stories of Note
The Saudi-led Organization of the Petroleum Exporting Countries (OPEC) is set to meet in the upcoming week to discuss the extension or elimination of oil production cuts. Russia is again set to join in the talks (making the "+" in OPEC+) and rumors are bouncing around that while Saudi wishes to extend production output cuts, Russia is less interested in participating this time around. Even if an output cut is extended and in some way enforced on OPEC members, the actual result for oil markets is less bearish but still relatively unclear.
Brazil had the disappointing experience of attempting to auction off drilling rights to huge oil fields in the country and failing to attract any bids by Big Oil. Only Chinese companies agreed to bid on several fields as part of a JV with the state oil company. Perhaps it has been the extended downturn in oil prices that have turned off the supermajors to developing potentially expensive projects. Perhaps it is a lesson to the Brazilian government of policies that make bidding on these projects too expensive. Regardless, the event is possibly of interest for investors active in the energy space.
