Weekly Kickstart (10/21/2019-10/25/2019)

Stocks continued higher last week, as the S&P 500 rose by 0.54 percent to 2,986.20. That left the benchmark index up 19.12 percent 2019-to-date, and just 1.31 percent below the record close. Equities remained buoyed by encouraging geopolitical headlines, e.g. the constructive trade negotiations between the United States and China and the increased prospects for a Brexit deal. There exists warranted skepticism about many of these positive developments, but at the same time the market may not be adequately discounting the potential for progress on such fronts. That was one possible interpretation of the excessive investor pessimism expressed in a Bank of America Merrill Lynch poll we looked at in September, and an updated version of the survey revealed that little has changed in terms of institutional sentiment this month. For example, nearly one in three fund managers anticipate a recession starting within the next year, and overall growth expectations deteriorated in October compared to the September survey.

The trade war was once again the top-cited tail risk that respondents are worried about, and 43 percent do not believe any resolution will ever be reached. Three-quarters of fund managers did admit that an end to the trade war could be very bullish for stocks in the next six months, and similar opinions were expressed about a German fiscal stimulus, a 50 basis-point cut by the Federal Reserve, a Chinese infrastructure package, and a Brexit deal. Elevated cash holdings, though, suggest doubts are high about these positive catalysts actually occurring. The contrarian argument is that the gloomy outlook among institutional investors adds upside risk to the market, and additional help for the bulls may come from the recently started Q3 corporate earnings season, i.e. positive earnings surprises. However, the risks remain two-sided, and even though major indices are now within striking distance of all-time highs, the uncertainty still surrounding the trade war, monetary policy, and a handful of other issues means volatility could easily pick up. Any regular investors unsure how to navigate this environment should consider consulting with a professional financial advisor and as always, we are here to help with any questions you may have.

To recap a few of the things we learned about the economy last week, the positives included that mortgage applications rose, single-family housing construction increased, homebuilder confidence jumped, and initial jobless claims held near a half-century low. As for the negatives, multi-family (rental) construction decreased, retail sales growth disappointed forecasts, industrial production declined, capacity utilization fell, and regional manufacturing gauges continued to send mixed signals. This week the pace of economic data slows down but there are still a few important reports on housing, factory activity, employment, and consumers scheduled to be released.