The mood on Wall Street is definitely bullish as investors looked at the benchmark index The S&P 500 index hit its fourth record in a row near Friday amid growing optimism that the US and China are moving toward a deal that could ease trade tensions and creating much needed security for US companies as they plan for 2020 and beyond.
The new highs in the stock market have been accompanied by a steady rotation into cyclical and valuable stocks, investments that typically surpass during periods of accelerating economic growth.
Neither the company's earnings nor financial data have yet to confirm this upturn and stock rotation, and therefore the market may be ahead and is due to a pullback, analysts and investors told MarketWatch.
"We quickly agreed and thought we were in the downturn, and investors were very, very cautious, and bought the important safe havens for a much more risky, bullish economic outlook," said Douglas Cohen, portfolio manager at Athena Capital Advisors, in an interview. "In the short term, things have gone a little too far and are preparing for at least a break, and I guess the sentiment in 2020 will start to become more fragile and volatile."
Since October 3 to Friday's close, S&P 500
SPX, + 0.77%
has risen 7.2%, Dow Jones Industrial
DJIA, + 0.80%
as advanced 7.4% and Nasdaq Composite index
COMP, + 0.73%
has reached 9.7%.
Fading recession phobia
Recession fears have actually ebbed, driven largely by the Federal Reserve's movement to cut interest rates by 0.75 percent points over the past three meetings, a policy change that helped boost confidence in future economic growth and helped bring a positive slope to the US Treasury yield curve.
Meanwhile, the share of investors predicting an economic downturn over the next 12 months dropped from 25% in September to 21% in November, according to Bank of America Merrill Lynch's credit investor survey, the sharpest two-month decline in 3 years.
However, evidence suggests that economic growth will continue slowly, even though the fear of a recession was excessive.
"The US economy does not fall on a cliff, but the domestic economy continues to decline," Lydia Boussour, senior US economist at Oxford Economics, told MarketWatch. She expects GDP growth to decline from 2.3% this year to 1.6% in 2020, with growth held down by continued weakness in business investment and a US consumer that will remain healthy, but if the situation stops improving after as job growth slows down. "There will be a significant deterioration in the economic outlook by March next year," she said.
Meanwhile, economic growth in the fourth quarter of 2019 looks less than promising after a sharp decline in industrial production in October helped change the Atlanta Fed's GDP estimates to just 0.4% growth in the last three months of the year.
Boussour expects that while some sort of US-China trade agreement will be reached, higher tariffs are likely to remain in place, and these additional costs, together with an environment of slow economic growth, low unemployment and rising wages, will make it difficult for S&P 500 companies to increase profits substantially next year, after earnings per share growth has been substantially flat in 2019.
With S&P 500 Athenas Cohen said to 17.5 times future earnings, "we are no longer cheap "You're going to need earnings growth to kick in next year," to justify the market's current price and "it's going to be hard to get that growth," he said.
Global growth to the bottom, but not rebound  US companies should also not rely on growth abroad to increase revenues, Boussour predicts global economic growth will come in at 2.5% in 2020, the same rate as in 2019, and down from 3.2% in 2018 , with growth in China declining from 6.1% to 5.7%, as the world's second-largest economy claims, with major trade barriers and its ongoing efforts to reduce debt burdens throughout the economy.
Other major economies such as Europe and Japan will benefit from global monetary stimulus from central banks, while the decline of the global industrial sector may come to an end, according to JP Morgan's Global PMI for Industry, which peaked in October after 18 consecutive months fall. "Even if you see a bottom, that doesn't mean a rise is in the cards," Boussour said.
None of these trends should pave the way for the ongoing rotation from growth and momentum stocks to value stocks, especially in cyclical sectors, including materials, industry and finance. "The quick snap of classic momentum stocks that aren't working and value is starting to work, which caught many people by surprise," said Mark Stoeckle, CEO and senior portfolio manager at Adams Funds.
"The problem we have with declaring that it is time to buy deep cyclical and valuable stocks is, when you look for revenue growth, it is not easy to find it," he added. "The value has outperformed, but it is too early to make the signal of 'clear'.
Cohen agreed, arguing that growth stocks will regain leadership when the reality of a declining economy is hit." The rotation probably won't last all that much longer just because the key variable that supported growth stocks was moderate growth and a low interest rate environment, and that's where we will be in 2020, "he said.
The week ahead will provide more grit for use to help investors understand the economy of the runway, including flash readings of IHS Markit's US Indices of Purchasing for Industry and Services on Friday.
Other key releases include U.S. home startup data and October building permits on Tuesday, and weekly unemployment requirements, existing home sales and a reading of the conference board's leading economic indicators on Thursday.
Third-quarter earnings season will continue to run in the coming week, with several major retailers reporting results, including Home Depot Inc. .
HD, + 0.31%
and TJ Maxx parents TJX Cos .
TJX, + 1.08%
on Tuesday and Lowe & # 39; s Cos. Inc. .
LAV, + 0.86%
and Target Corp .
TGT, + 1.89%
Thursday contains revenue releases from Intuit Inc .
INTU, + 0.48%
Ross Stores Inc .
ROST, + 0.47%
Gap Inc .
GPS, + 3.44%
and Nordstrom Inc
JWN, + 0.58%