As projected in many of my previous "market updates," all the market indices have closed at their all-time highs this week, with the S&P 500 index closing at the 3067 level on Friday.
What is behind the market rally?
Investors have been very pessimistic about the outlook on the economy, and they were clearly wrong. I have been projecting that the coordinated actions by global central bankers to lower interest rates would reduce recession risks. This is exactly what is happening today. Just this week, we got economic data from the United States that was strong and exceeded all expectations. On Friday, data showed that the economy added 128,000 jobs for the month, well above the tepid 85,000 gains expected. Importantly, the housing market and consumer spending remains healthy, supporting the U.S. economy. Consumer spending represents 70% of the US economy, so it makes sense that the market should continue to find plenty of reason to go higher, at least in the short term.
Optimism over progress in a Phase One U.S.-China trade deal added to sentiment. The Office of the U.S. Trade Representative said on Friday that Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin held a “constructive call” with China’s Vice Premier Liu He about the first portion of a China trade deal. He added that “they made progress in a variety of areas and are in the process of resolving outstanding issues.” Also as stated in previous market updates, a partial solution with China is likely to take place soon which would reduce future tensions and restore investor confidence.
The Federal Reserve cut its benchmark interest rate for the third time this year to a target range of between 1.5% and 1.75%. At HDO, we have been projecting and preparing for lower interest rates since late 2018 when other investors were still expecting interest rates to go higher. My projections were at 2 to 3 rate cuts and we got three of them so far this year. This week, we had a wave-after-wave of positive earnings surprises. In fact, of the 23 S&P 500 companies that posted earnings results this week, 17 topped analysts’ estimates by an average of 8%. Corporate earnings remain strong.
In conclusion, the economic data this week indicated that the US economy is on better-footing than once thought and supported with low interest rates creating a continuation of the “Goldilocks” conditions for the equity markets to continue to move higher.
Where do we go from here?
As a reminder, we are in the last phase of this bull market whereby equities tend to rally at their fastest pace, faster than any other time during the secular bull market. This is where most of the gains tend to happen in a short period of time. My views have not changed, and I expect this bull market to continue for another two years at least.
Now that the markets have broken out to the upside, it looks as if the market is going to continue going higher, driving to much higher levels over the longer term. Ultimately, new highs should continue to be seen not only based on economic figures, but also the technical analysis we have seen over the last several weeks. We have formed an ascending triangle, and that ascending triangle measures for a move towards the 3200 level in the medium term. Ultimately, I believe that the S&P 500 index should reach the 4000 level over the next 24 months. I think that short-term pullbacks should continue to be thought of as value opportunities, as the market is obviously very bullish. Please keep in mind that the markets will not go up in a straight line, and that we are likely to continue to see market corrections, and sometimes scary ones in the medium term. But they should happen at a higher level from here, so being fully invested makes a lot of sense. However, the long term picture is very constructive and patient investors are set to be very well rewarded.
The Best Course of Action
We recommend that our members remain fully invested in the stocks and securities that we recommend. As a reminder, please keep well diversified across all the stocks and sectors as per our recommended allocation, with 40% exposure to fixed income. This is key to keep the volatility of your portfolio low. Another reminder is that HDO targets mainly solid "value stocks" trading at low prices. By definition, "value stocks" tend to be in sectors that are out of favor. Therefore it is difficult to time a bottom each time we send a "Buy Alert". However, this is a great strategy knowing that we are invested into these stocks at cheap valuations, and that time is on our side. Eventually, fundamentals almost always prevail, and we tend to see strong gains for the vast majority of our picks. The key is to be patient and add positions slowly. In the meantime, we are collecting hefty dividends.
A Quick Note on the Energy Sector
While the general markets are at their all-time highs, most stocks from the Energy sector, including the Midstream Sector, are trading at their all-time lows. While the Energy sector remains mired in a long-term downtrend, it is interesting to note that it is showing some early signs of a double-bottom following its recent sell-off. My views are that any positive news should provide a big boost for this sector. Today, a recent report from BoA Merrill showed that overall asset allocation towards the Energy sector is well below its historical average than any other sector/asset class. This makes this sector a deep value one and we are happy to have exposure to it, mainly through our midstream picks and our only upstream pick which is Vermillion Energy (VET). We will be releasing soon a detailed report on our views the midstream sector and why this sector is set to soar.
"All that the South has ever desired was that the Union, as established by our forefathers, should be preserved, and that the government, as originally organized, should be administered in purity and truth." – Robert E. Lee
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