Market update: What will shape markets through year-end? 

Anthony Saglimbene, Ameriprise Global Market Strategist

As of 10/15/2019


Looking back

  • Slowing U.S. manufacturing and services activity is causing growth to decelerate.

  • However, the pace of job gains continues to support the economy.

  • The S&P 500 finished its strongest three-quarter showing since 1997, up more than 20%.  

Up ahead

  • Analysts expect third quarter corporate profit growth to decline for the third consecutive quarter.
  • The bull and bear case for additional stock gains in the fourth quarter appear equally weighted.
  • Corporations and investors may continue to take their cues from developments on trade.

Data Source: FactSet


Signals remain mixed   

Recession risks are intensifying, corporate profit growth around the world is slowing and geopolitical frictions are increasingly destabilizing investors’ confidence about the future. The market’s largest risks — a U.S./China trade war and slowing economic growth — continue to loom large on investment sentiment and give us pause.

At the same time, the S&P 500 Index ended the third quarter near its all-time high, thanks in part to the outperformance of several cyclical areas across the U.S. economy this year. Defensive stocks continue to outperform, while previously underperforming areas of the market were strong in September. This points to healthy participation across the U.S. market entering the last stretch of 2019. However, in many respects, the investing environment remains as uncertain today as it was at the start of the third quarter. 

While stock prices may face increased volatility during October, history suggests the final months of the year in aggregate produce positive results. Although 2018 surely missed the mark on this point — the S&P 500 declined by 13.5% in fourth quarter 2018 — we believe last year’s performance was more the exception rather than the rule. With that said, developments on the trade front may once again challenge favorable historical trends if U.S./China trade tensions take another turn for the worse.

Risk and opportunity appear balanced

As we begin the final quarter of 2019, investors should ground themselves in market themes that continue to support stock prices and keep tabs on catalysts that pose risks. Though hardly an exhaustive list, below is our summary of the bull and bear case for stock prices over the coming months. 

At a high level, we believe a little more caution is warranted today. Nevertheless, investors would be remiss if they simply ignored the market’s resiliency, which, in our view, should temper a more bearish view.

The bull case for U.S. stocks The bear case for U.S. stocks
Market internals remain supportive Unresolved U.S./China trade tensions are a key risk
More stocks and sectors participating on upside days Important yield curve indicators moving in and out of an inversion signal caution
Investor sentiment is subdued Global growth, including manufacturing activity, is soft or contracting
Consumers are working and spending Washington politics a wildcard, including the 2020 presidential election and President Trump impeachment inquiry
Seasonal tailwinds – a strong year through three quarters bodes well for a solid finish IPO boom going bust but shows market froth is limited – actually a healthy sign for longer-term investors  
Interest rates are moving lower Earnings growth is slowing and could moderate more than expected if trade tensions rise
Economic surprises moving higher (i.e., data in aggregate coming in better than expected) 2020 earnings expectations are too high
Leading economic indicators still not flashing a recession U.S. dollar holding strong, which could crimp multinational profits
Housing seeing a lift from lower interest rates  Consumer confidence data showing mixed sentiment – will consumers continue to shoulder the economy?
Stocks offer a higher yield compared to government bonds with better long-term growth potential Job growth is moderating
Small businesses still say it’s difficult to find qualified workers (e.g., a tight labor market could help support economic stability) Stocks underperforming bonds over the last year
Financial conditions remain healthy  Outside of Tech and Consumer Discretionary, defensive sectors outperforming in 2019
Valuations appear fair High debt levels among governments and corporations

A quick take for your portfolio    

We believe investors should tactically overweight U.S. assets and alternative investment strategies, underweight international investments, and ensure their portfolios hold a healthy amount of high-quality investments built to weather a range of market environments. Please consult your Ameriprise financial advisor for more information on our asset allocation guidance as well as recommended investments that can fill a high-quality portfolio. 

The numbers

Indices

As of October 7, 2019

Data source: Morningstar Direct

S&P sector returns YTD