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%.
- 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.
As of October 7, 2019
Data source: Morningstar Direct