Earnings and Record Highs

Stocks are reaching record highs this week; this could be attributable to the earnings that came out over the last month except that those earnings reports are on average down. Revenue was essentially flat for the S&P companies so far, led lower by the energy and materials sector. If earnings are not that stellar then why are markets rallying so much. The answer comes down to longer term certainty. 

Despite the negative news, slower earnings, and constants talks of bubbles; investors are getting long-term clarity around how the global economy will function in the coming year. At this point in the year most institutional investors are looking to position themselves for 2020. This means generating projections on how the markets will perform and shifting allocations. A brief look at the positive and negative factors going into next year will help understand what will affect market direction in the coming year.

Positives

Trade war progress:
The phase one of the US and China trade agreement looks likely to be signed. This is a good first step towards the US backing down from the rhetoric on tariffs. As an election year looms it is likely that Trump will look for more victories to boost his credentials in areas of focus. We saw this tactic in the Middle East with a raid on the Isis leader at the time the pullout of north Syria was getting scrutiny.

Fed rate cuts:
The Federal Reserve has cut rates at its last meeting and gave projections that there will be no need for a policy change in the coming year. This was looked at by the markets as a bullish prospect with the Fed thinking there was enough done in terms of 'insurance cuts' to strengthen economic growth and is not concerned about inflation in the near term. In short, a perfect rate environment for growth. 

Negatives

Brexit delays:
The news initially was positive that the UK got an extension till the end of January. This allowed for more room to maneuver and even plan an election in desired. However, the history of British politics is making the prospects of a smooth 3 months very difficult to imagine. Any stresses in the process can have implications on the 2020 outlook for the UK and Europe as a whole. This could cause many businesses to also pare back expectations for the global economy. 

Consumer spending:
In the US the consumer has been the biggest booster of the markets this year. As economic data has come in mixed over the last year, consumer spending has remained robust. This is attributable to low unemployment and earnings growth which has empowered the consumer to spend more and take on more debt. If the trends in employment and wage growth keeps pace this should continue into the next year. But careful attention will be needed for signs of things slowing down. Current debt ratios in the US show little wiggle room for growth in ​