U.S. Equity Markets Running Hot on Fed-Induced Rally

Willie Delwiche

The equity markets rallied for the fourth week in a row with most of the important stock indices gaining more than 1% for the week.

Record highs by the S&P 500 Index INDEXSP: .INX and NASDAQ Composite INDEXNASDAQ: .IXIC represented a technical breakout of the trading range stocks have been locked in since July. 

As widely expected, the Federal Reserve lowered the fed funds target rate by 25 basis points for the third time this year to a range of 1.50% to 1.75%.  Historically, three rate cuts by the Federal Reserve has found stocks higher 12 months later.  

GDP growth at 1.9% has been lukewarm yet the jobs numbers are booming.  Where are we in the economy?

Friday’s payroll report was far better than expected with 128,000 jobs added in October despite the now settled General Motors strike.

Additionally, there were some strong upward revisions in the previous months’ jobs numbers.

Yet the third-quarter GDP number came in at a lackluster 1.9%, down from 3% in the middle of last year. 

The bad news is that the Institute for Supply Management and its Manufacturer’s Purchasing Managers Index fell below what was forecast.  The manufacturing slowdown is likely related to trade uncertainty. 

Additionally, global growth is slowing.  Near-term progress in the U.S./China trade negotiations would help to calm the corporate and global uncertainty. There is also an outside chance that Congress will pass the United States Mexico Trade Agreement which would be a huge boost to America’s manufacturers, farmers and business.

Against the backdrop of potential positive news on trade, along with solid economic fundamentals and low interest rates, the U.S. economy appears to be on firm footing, supported by rising household spending, a strong labor market and rising wages.   

How might the stock market respond to impeachment proceedings?

Historically, politics has very little effect on the stock market.  Last week, after the Democrat-led House of Representatives voted on a resolution to open an impeachment inquiry into whether President Trump pressured a foreign country to investigate a political rival for corruption in exchange for military aid, the market seemed to shrug it off. 

The stock market finished the week at record highs, due mainly to strong jobs numbers and the Federal Reserve lowering its benchmark interest rate.  The market has shown that it is more likely to react to U.S./China trade news and economic news rather than partisan political fighting. 

Should the House vote to impeach the President, the decision would then go to the Republican-led Senate where a two-thirds majority would be required to convict, which seems unlikely.  It’s important to note that the S&P 500 rallied 28% in 1998 when Bill Clinton was impeached and fell 13% in 1974 during the Nixon impeachment proceedings. While political issues may dominate the headlines, and cause some volatility, it will be the economic landscape that will be more important.

Where to invest?

stock market leadership sectors performance - week november 4

The latest S&P 500 sector rankings show defensive sectors (utilities and real estate) remaining at the top of the list.  Nevertheless, cyclicals continue to move up the chart with the financial and industrial sectors hitting new highs and the technology sector making new highs.  We expect this trend will continue. 

We think it important that portfolios have U.S. Treasury notes and high-grade, intermediate-term corporate bonds for diversification and to help cushion portfolios during periods of volatility.

stock market fear greed indicators - week november 4

Twitter:  @WillieDelwiche

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