U.S. Equities Update: No Signs Investor Euphoria Yet

Willie Delwiche

The stock market rose for the sixth week in a row last week sending the Dow Jones Industrial Average, the S&P 500 Index and the NASDAQ Composite Index to new record highs.

The rally is supported, in large part, by optimism that the U.S. and China will come to a short-term agreement on trade and by an accommodative stance by central banks, including the Federal Reserve.

Today we discuss some key investing themes and new to watch in the week ahead.

With the stock market at all-time record highs, are we seeing euphoria in the market, which often characterizes a stock market top?

History shows that investors get more bullish in late-cycle environments. Additionally, bullish sentiment typically runs higher late in the year as investors look to the New Year.

We have seen bearish sentiment for most of this year as investors pulled money from stock funds and while bond funds experienced record inflows. But investors are now beginning to get more optimistic.

However, there remain pockets of skepticism. At an important peak in the stock market, optimism is typically widespread and deep seated. In the present example we see optimism entering but nothing close to the euphoria seen at an important market peak.

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Have equity indices come too far too fast?  

With the manufacturing data showing signs of a slowdown and with predicted declines in third-quarter earnings offset by a strong consumer and an accommodative Fed, the stock markets will likely grind higher. We always suggest investors consider the strongest sectors of the stock market which currently include technicals, financials, industrials and materials, all of which would benefit from a trade truce and the passage of the United States Mexico Canada Trade Agreement.

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Where should investors look for income in this environment?

The utilities sector and real estate investment trusts have been the go-to sectors for income-oriented investors this year. At this juncture, I would not abandon that strategy but would look at additional alternatives. With interest rates low, actively managed funds would be our suggestion. Baird offers many proprietary stock and bond mutual fund choices, with strong track records. Another alternative would be the managed accounts within the Baird Align Portfolios. The Baird Tactical Yield Portfolio (+12% YTD) is geared toward the conservative investor, with income and preservation of capital as its objective.

Why is the stock market experiencing a rally when earnings and growth are at mediocre levels?

The Atlanta Federal Reserve downgraded their outlook for gross domestic product (GDP) in the fourth quarter to 0.3% from 1.00%. Industrial production was reported down in October and has fallen three of the last four months. These numbers are likely due to the impact of the back and forth between the U.S. and China over trade but also impacted by the GM strike. Analysts are projecting earnings declined for the third quarter and very little growth for the full-year 2019. History has shown that short-term earnings and stock market pricing do not necessarily move in sync with each other. The consumer, as evidenced by strong retails sales, continues to spend and represents the backbone of this economy. Investors are benefiting from low interest rates and optimism regarding U.S. China trade and a reprieve from recession fears.

Twitter:  @WillieDelwiche

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.