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After a three-and-a-half-month, largely uninterrupted rally in stocks, the period of calm ended last week as the coronavirus outbreak led to a bout of volatility. Though it is difficult to predict when the virus will be contained and how many more lives might be lost, we provide some historical perspective on other major global health events to help assess potential market impacts.
2019 was a remarkable year for investors with many asset classes delivering positive performance. Both the Standard & Poor’s 500 Index, a gauge of U.S. stock market performance, and the Dow Jones Global (ex U.S.) Index delivered double-digit increases (see the below table). Bonds and gold rallied, too, delivering positive returns for the year.
Investors may find themselves reluctant to ring out the old and ring in the new this week. During 2019, stock and bond markets delivered exceptional returns.
On Friday, the unemployment report flashed its numbers like a hair model in a shampoo commercial. The Bureau of Labor Statistics reported 266,000 new jobs were created in November. That was better than expected even after deducting the 40,000-plus General Motors employees returning to work, reported CNBC.
Sometime, probably not so long ago, comedian Dave Barry wrote, “Once again, we come to the Holiday Season, a deeply religious time that each of us observes, in his own way, by going to the mall of his choice.” Not so much anymore.
Corporate earnings growth has ground to a halt, but we think better times lie ahead. While tariffs and ongoing trade uncertainty could delay improvement, we remain optimistic that some progress on trade will be forthcoming and earnings growth could pick up over the coming quarters.
Since we began highlighting the return of fiscal leadership as a primary driver for economic and market activity nearly two years ago, we’ve seen the return to central bank dominance, particularly by the U.S. Federal Reserve. This has significant implications for global markets.
There’s a growing pile of negative-yielding debt around the world amid extraordinary monetary policy initiatives. While maintaining respect for global money flows, we believe the combination of economic fundamentals, domestic monetary policy, and a widening federal budget deficit limit the prospects for subzero yields in the United States.
We expect the combination of a softer economic growth outlook with mild U.S. inflationary pressures and ultralow yields internationally to potentially translate into lower domestic yields. The uncertain U.S.-China trade situation has weighed heavily on business investment, resulting in weaker manufacturing activity worldwide.
We are tweaking our 2019 forecasts to reflect increased risk to economic growth and corporate profits from the ongoing trade conflict between the United States and China. We are maintaining our year-end fair value target on the S&P 500 of 3,000 as lower interest rates and inflation support higher valuations.
A closely watched point on the Treasury yield curve has fallen negative for the first time in this economic cycle.
As shown in the LPL Chart of the Day, Yield Curve Inversion Raises Economic Questions, the spread between the 2-year and 10-year Treasury yields fell as low as -2 basis points (-0.02%) in trading on August 14.
U.S. stocks have hit another trade-induced summer storm.
The S&P 500 Index fell 3% on Monday, its worst day since December 2018. The index is now about 6% from record highs in U.S. stocks’ worst bout of volatility since May.
The S&P 500 Index is very close to our year-end target of 3,000. The S&P 500 is up nearly 20% year to date and, after first closing above our year-end fair value target range July 12, it now stands less than 1% from our target [Figure 1]. Now that we’ve reached our target, is it time to sell? Here we provide some context for our stock market forecast to help explain why we haven’t raised our fair value target or recommended investors reduce their equities allocations.