Stocks Breeze to Records as Trade Hopes Cover Up Economic Gloom

(Bloomberg) -- U.S. stocks rose for a sixth straight week as optimism that the Trump administration will clinch a partial trade deal with China diverted attention from evidence that economies are struggling at home and abroad.

The S&P 500 climbed 0.9% in the five days to close above 3,100, and the Dow Jones Industrial Average pushed past 28,000 for the first time. Six weeks of gains mark the longest rally in two years. The Cboe Volatility Index dipped below 12 and ended near the lowest since July.

The longest bull market on record has shown no sign of slowing down, with the latest advance pushing the S&P 500’s yearly gain to 24%. Prospects of a trade deal between the U.S. and China have emboldened bulls who might otherwise be fretting over deteriorating earnings estimates and forecasts from regional Federal Reserve banks showing U.S. gross domestic product has barely budged in the fourth quarter.

“The question is whether the economy is in a good place and whether stock market investors are blithely ignoring today’s real economic data news in favor of their hopes and dreams,” said Chris Rupkey, chief financial economist for MUFG Union Bank. “The smart people aren’t clapping today. The risks the economy faces remain a threat.”

Bears spent Friday pointing to the a model published by the Atlanta Fed, its GDP Now forecast, which showed fourth-quarter growth is tracking at 0.3%. The tool is a real-time compilation of economic reports that evolves as data is released and frequently diverges from the consensus projection of economists. Their view currently sits at 1.7% growth for the last three months of 2019. In mid-March, the nowcast pointed to growth of 0.2% for the first quarter, a number which ultimately came in at 3.1%.

Other data this week showed the vulnerability of global economies to trade conflicts. Data on Thursday began with sharp slowing in Japanese growth to a fraction of forecasts, before China reported the smallest increase in fixed-asset investment in at least two decades. In Europe, Germany posted surprise growth -- but only after a deeper contraction than previously estimated.

None of that did much to slow a six-week rally in American stocks that started as the world’s two largest economies signaled a detente in their 18-month trade spat. The latest sign that talks over the first phase of a broad deal are entering the final stages came Thursday, when a White House official said the sides are closing in on a deal. The effects of tariffs have hampered corporate decision-making and weighed on global growth.

“When this is all said and done, we’re going to be in a little bit better spot before we started,” said Peter Mallouk, president of Creative Planning, a wealth-management firm with about $45 billion in assets. “Markets are going to like it.”

The Fed reassured investors that the economy remains on solid footing, even without a deal. In an appearance before the House Budget Committee Thursday, Chairman Jerome Powell voiced confidence the record expansion will stay on track.

“The U.S. economy is the star economy these days,” he said during the second day of his testimonies before Congress this week. “There is no reason to think that I could see that the probability of a recession is at all elevated at this time.”

To Oppenheimer Asset Management’s John Stoltzfus, the resiliency is proof the world economy can work through the tariffs imposed thus far. ”There is a possibility that the markets are focusing on the resiliency of the U.S. economy and the relative resilience of the global economy even though it’s experiencing weakness,” he said in a phone interview.

With economic data hanging tough, sentiment has rebounded, pushing investors toward riskier assets. Wall Street’s rotation roulette has meant that previously unloved areas are suddenly in the spotlight.

Equity ETFs have taken in almost $21 billion in November, already 70% of the flows for all of September, which was the best month in 2019, according to data compiled by Bloomberg Intelligence. Value and cyclical plays have been among the biggest beneficiaries this month -- financials, industrials, materials and technology have seen the biggest inflows. On the other hand, defensive areas and bond-like strategies are seeing outflows: fixed-income ETFs are on track to see their worst month of inflows in more than a year.

The third-quarter earnings season has also surprised to the upside. By the end of next week, 94% of the S&P 500 market capitalization will have posted results. As the season winds down, S&P 500 companies are on track to post a 0.6% year-over-year decline in third-quarter EPS, better than the expected drop of 3.6% at the start of the season, according to Bloomberg Intelligence. Home Depot Inc. and Lowe’s Cos Inc. are among the companies yet to report.

“I’m sure there are more than a few jittery investors out there but for the most part we’re seeing some smooth sailing,” said Mike Loewengart, vice president of investment strategy at E*Trade Financial Corporation. Walmart’s earnings show the consumer’s strong, trade tensions don’t pose the risk of boiling over anytime soon, and the Fed has rates at historic lows, he said. “All this translates into a much more tranquil and certain environment, which is where markets tend to thrive.”

--With assistance from Luke Kawa.

To contact the reporters on this story: Vildana Hajric in New York at vhajric1@bloomberg.net;Claire Ballentine in New York at cballentine@bloomberg.net

To contact the editor responsible for this story: Jeremy Herron at jherron8@bloomberg.net

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