/Investors cast off recession fears to power S&P 500 to new record close

Investors cast off recession fears to power S&P 500 to new record close

Fuelled with new optimism over a U.S.-China trade deal and continued easing of monetary policy by the Fed, investors have seemingly cast off recession fears and are once again pumping money into stocks, helping to drive some key U.S. indices into record territory.

On Monday, the S&P 500 closed at a record high of 3,039 points, eclipsing the mark of 3,025 points it set in late July, while the Nasdaq Composite Index flirted with a record as well, before finishing five points off the mark. The indices have seen rallies of five and six per cent respectively over the past three weeks.

Scotia Wealth Management portfolio manager Mike Newton said the new trading activity is reflecting what hard economic data such as the U.S. unemployment rate, which descended to a 50-year low in September, and strong consumer retail sales have suggested all along: fears of a recession that have been percolating for a few years now may have been overblown.

“My view is we’re probably going to skate through this,” Newton said, referencing a potential recession.

Another encouraging sign to Newton is that the rally doesn’t appear to have been led by just a small handful of stocks. Newton points to the performance of the Invesco S&P 500 Equal Weight ETF, which holds the same stocks as the S&P but on an equal weight basis, rather than a market capitalization-based weighting. It has rallied more than its parent index, which tells Newton that the rally has breadth and is healthier than if it were led by only five or ten names.

U.S. stocks are picking up steam right when CFRA Research U.S. equity strategist Sam Stovall expected them to. The markets are usually at their strongest between November and April, Stovall said, rallying seven per cent on average. Throughout the remaining six months, they only gain about 1.5 per cent. In this period, it’s the investors who have exposure to cyclical stocks such as those in consumer discretionary, industrials and technology that reap the rewards.

“For those investors who had been playing it safe, history would say but not guarantee that now is the time to let go of your worries and gravitate toward the more cyclical areas of the market,” Stovall said. “‘Tis the season to rotate.”

Prior to the latest activity, the markets appeared to have rotated from a focus on growth stocks to value, Stovall said. And now, investors should consider switching back.

‘Tis the season to rotate

When stocks first rotated toward value, Hugh Johnson, chief investment officer of Hugh Johnson Advisors, had to avoid the temptation to transition his portfolios, most of which are overweight on growth stocks. That kind of a rotation, he said, is usually one that leads into a recession, even if the markets continued to edge higher.

“I said, ‘Holy smokes,’ the markets may be going up but it might be signalling darker times ahead,” Johnson said.

His portfolios would suggest he’s still bullish but Johnson is close to split on whether the U.S. will see a soft or hard landing in 2020 and beyond, leaning slightly to the former. As a result, he’s built defence into his portfolios by adding exposure to utilities and consumer staples stocks.

The re-emergence of growth stocks hasn’t convinced him to be less cautious. At this point, “I can’t imagine what would get me to become less worried,” he said.

The markets have turned on a dime before and it wouldn’t take much for the same to occur again. If the U.S. Federal Reserve does not cut interest rates this week or if U.S. and China trade tensions escalate once again in December when the Trump administration has made it clear that tariffs can still be levied, the outlook changes.

It can change with one tweet from the U.S. president alone, Stovall said, but he still doesn’t see a recession — “or at least right away.” He isn’t projecting a boom in the U.S. economy, but does believe that it’ll see “solid, sustainable growth” of over two per cent in every quarter between now and the end of 2020, excluding 2019’s third quarter. After that, Stovall points to the lyrics of a 1959 song by Brook Benton.

“It’s just a matter of time,” he said.

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