Since plummeting -20% from the end of September to the day after Christmas, the S&P 500 has bounced back by roughly +12%. From a trading perspective, nearly all of our most closely followed technical indicators reached deeply oversold levels in late December. However, many, such as our Relative Strength Indicator, have now bounced back into the middle of the range. The S&P 500 is now trading at 15.3x, toward the bottom end of the range that existed before the steep selloff in December.
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We believe that Chinese policymakers have started stimulus programs that will include tax cuts, required reserve ratio reductions, policies to boost local government spending, and more direct lending to private enterprises. We also expect a U.S.-China trade deal and diminished Fed rate hike concerns to also help improve the outlook for emerging markets more broadly.
We believe that weak productivity growth has been the biggest secular drag in the aftermath of the 2008-09 Financial Crisis. Looking into the back half of 2019 and 2020, U.S. fiscal stimulus will be fading, while monetary conditions will most likely continue to gradually tighten around the world. The critical question at this point will become whether or not productivity growth picks up to compensate.
Earnings results over the past three reporting seasons have been strong, with companies handily surpassing analysts’ expectations on both the top- and bottom-lines. This includes S&P 500 companies in aggregate beating revenue by +1.3% and earnings by +6.5% during 3Q earnings season.
As investors know all too well, the ISM Manufacturing survey reported yesterday was very disappointing, with the index coming in at 54.1 for December, down from 59.3 in November. The more volatile New Orders component registered an even more dramatic drop, to 51.1 from 62.1.
At this time last year, we were bearish on Chinese growth prospects because we thought policymakers would slow credit expansion in an attempt to gradually diffuse credit bubbles and reduce an overreliance on infrastructure investment to meet growth targets. This generally has played out as we expected. However, recent trade tensions with the U.S. have compounded the negative economic momentum, in our view. This has clearly showed up in recent reports on retail sales and industrial activity, as well as in Apple’s revenue guidance that was released last night.
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