Last week was a tough week for stocks, with the S&P 500 Index down 4.5%, the worst performance since March. So what are some things investors should consider? To help answer that question, here are five takeaways on the near-term outlook for stocks.
- We continue to see the U.S-China trade dispute as the biggest headwind for stocks. Understandably, stocks threw a tantrum last week after U.S. trade officials walked back part of the overly optimistic recount of the Trump-Xi meeting at the G-20 summit. We continue to view the emergence of a path toward progress favorably and expect an agreement in the coming months, despite mixed messages from both sides and the arrest of a Chinese telecom executive.
- Leading economic indicators are still pointing positive. The Conference Board’s Leading Economic Index (LEI), one of our favorite economic indicators, rose 5.9% on a year-over-year basis last month. This is a positive sign, suggesting chances of recession over the next 12 months are remote.
- Risk of a Fed policy mistake has eased. Federal Reserve (Fed) Chair Jay Powell’s speech on November 28 provided evidence of more flexibility from the Fed, thereby limiting the chances of over-tightening. Powell essentially told the markets the central bank would not be as aggressive in 2019 as many feared. In addition, the current two-year Treasury yield of approximately 2.70% is a market signal suggesting to policymakers that they shouldn’t raise rates much higher.
- Oil has been a supply problem. Sharply lower oil prices are being cited by some as a sign of looming recession. But oil’s weakness has been driven mostly by supply issues, including Iran sanctions, record levels of U.S. production, and elevated domestic inventories. OPEC’s decision to cut 1.2 million barrels of production last week is a positive step.
- Progress has been made toward putting in a bottom. Recent volatility may have provided one of the most important components of a stock market bottom: fear. We have seen elevated hedging activity, increased trading volume, and extremely negative breadth (few stocks gaining). We see these signs of fear—as the S&P 500 remained above 2018 lows—as bullish. Keep in mind that retesting prior lows, though painful, is an important part of the bottoming process.
LPL Chief Investment Strategist John Lynch explains, “While we continue to monitor the trends discussed here, we view the fundamentals supporting growth in the economy and corporate profits as still favorable. At the same time, we recognize the difficulty market volatility can have on market confidence, and we encourage investors to focus on the positive fundamentals supporting demand.”
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