Don’t Place Your Bets

Key Points

  • Volatility has receded, but stocks have made little headway due to the lack of enthusiasm surrounding a trade truce between the United States and China.

  • Economic “surprises” have been mixed across the board and key indicators have not confirmed a resumption of strength; while the monetary policy outlook remains elusive.

  • The timeline for a Brexit deal has been fluid, yet support is building along with a somewhat brighter forecast for the U.K.’s economy.

“An investment in knowledge pays the best interest.”
― Benjamin Franklin

Sound and fury

While volatility has subsided of late, U.S. stocks remain in a wide trading range and have yet to surpass their July highs. Mixed earnings and economic data; persistent skepticism surrounding a U.S.-China trade truce and Brexit; and monetary policy’s perceived impotence have kept equities around the world from breaking out to the upside. U.S. stocks are at relatively strong levels and continue to crawl towards new highs, but myriad non-confirmations have revealed that little progress has been made in the past 21 months. Since January 26, 2018, nearly every major global index has experienced a bear market at some point; and some have failed to come back to their prior highs. You can see from the table below that U.S. large-cap and technology stocks have eked out positive gains up until now, but U.S. small-cap and international stocks have been left behind; along with the Value Line Arithmetic Index, which includes 1,700 stocks and represents a broader swath of the U.S. stock market

Performance Since January 2018 Has Been Quite Mixed

Index Performance 1.26.18-10.24.18

Source: Charles Schwab, Bloomberg, as of 10/24/2019. MSCI data as of 10/23/2019.

With the exception of small caps’ weakness, U.S. stocks overall have managed to stay above their January 2018 highs; yet the current bull market has had some weak underpinnings—not least being extreme bouts of volatility (notably, the near-bear market in the fourth quarter of 2018) and defensive sectors’ leadership. As you can see from the following table, sectors that are considered “safe havens” have led equities higher; showing that underlying market behavior is reflecting ongoing economic uncertainty.

Defensive Sectors Continue to Lead Cyclicals

Sector Performance 1.26.18-10.24.18

Source: Charles Schwab, Bloomberg, as of 10/24/2019.