What a difference a year makes! During Q4 2018, the imposition of the first round of U.S. tariffs on imports from China, the cumulative impact of 200 bps of rate hikes from the Fed, and Chairman Powell’s comment that the Fed’s quantitative tightening program was on ‘auto pilot’ served to cause investors to flee from equities. Stocks took a 20% nosedive finishing down roughly 10% for 2018. A year later, Trump was cutting tariffs, the Fed had cut rates three times & since mid-September 2019 the Fed’s balance sheet had been growing at an annualized rate of 40%. Stocks were on fire, up 22% (TSX) to 35% (NASDAQ) for the year and investors chased equities into year end. Now with elevated valuation dispersion (good for ‘value’ stocks) but a modest outlook for growth (good for ‘growth’ companies), many investors are puzzled about what to do. After reviewing December and 2019 as a whole, this commentary will table a few thoughts and our bottom line on 2020.
The attitude of investors towards equities was buoyed last month by optimism that a China U.S. trade deal would get done, belief that the rate of change in global economic activity had bottomed and news that the Federal Reserve was growing its balance sheet again. Whether one calls it QE or not, in joining the Bank of Japan and the ECB, the graph on the below left shows the clear reversal from the balance sheet tightening of late last year. In fact the dashed line of forward estimates on the right side of the graph shows this latest central bank party is just getting started. As a result, after having sold equities to buy money market and bond funds during the past couple of years (please see the graph on the below right), FOMO (‘fear of missing out’) catalyzed investors to start chasing stocks. This renewed buying drove the strong November for stocks, one that included 11 fresh all-time highs for the S&P 500.
October 2019 marked the 2nd consecutive month that value stocks beat growth stocks yet the broader FANG index, largely not representative of value, was the key driver of the strong performance in U.S. equity indices, gaining more than 6%. Hence, while a growing group of traders push the reflation story that sees large fiscal stimulus reaccelerating global growth and boosting the relative performance of the value factor and non-US equities, it’s largely the degree of tape action and the anticipation of this forward change in fundamentals that to date supports this pitch.
While our monthly commentaries typically recap what happened last month with a snapshot on our outlook, given that the market’s current noise level is louder than a Guns ‘n’ Roses concert, this month we’re going to reverse that formula.