Stock Doomsayers Hushed by Latest Signs of Economic Strength

(Bloomberg) -- What is making stocks so turbulent lately? The trade war is half of it -- the bad half -- while on the other side are signs that should the economy be left to its own devices, the tidings for bulls get rather tempting.

It may be difficult to recall, but it’s a case premised on stimulus, consumer demand, bond-adjusted valuations and even earnings.

“There’s another story out there that’s gathering the attention of investors,” John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, said in a phone interview. “The fundamentals remain intact in the sense of the U.S. economy, which continues to show us sustainability. The slowing does not appear to us to be recessionary.”

Quickly, before another tariff tweet lands and with the Dow Jones Industrial Average up 400 points, a primer. Should international commerce survive, U.S. investors are potentially faced with what economists see as three more years of growth, unemployment hovering near a 50-year low and Federal Reserve Chairman Jerome Powell cutting rates.

“If you think about the last month of market action, it was dominated by trade headlines, but in the background was pretty stable economic data absent of manufacturing,” Michael Antonelli, institutional equity sales trader and managing director at Robert W. Baird & Co. “All the noise is masking that the economy, by and large, is doing OK.”

Beyond awful manufacturing reports, other areas of the economy look broadly decent. Data Thursday showed the services sector is expanding, hiring continues apace and durable goods are being bought. Friday’s employment report is expected to show 160,000 new jobs added in August.

If manufacturing data stabilizes, “which seems like a much higher-probability event than many expect, an extended reversal of the safety panic should be expected,” said Dennis DeBusschere, head of portfolio strategy at Evercore ISI.

Consumption still remains robust and U.S. consumer spending, the main engine of economic growth, is growing at the fastest pace since 2014. It comes amid not-too-hot, not-too cold inflation.

Treasury yields may be pointing to a recession. But they’re also low enough to give cover to equity multiples that are frequently cited by bears as being too high. If you’re looking for return, the S&P 500’s earnings yield of 5.1% looks pretty good next to a 1.58% fixed payout from bonds.

Strategists at Bank of America Merrill Lynch are bullish on stocks for 2019. The trade war, rather than triggering a recession, has pushed interest rates lower, they argue, which could be a positive for risk assets.

Bears talk about paltry earnings, and it’s true, estimates for S&P 500 profits have been coming down all year, from around $174 a share in December to $164 today, poised for sub-4% growth. Relative to two years ago, on the other hand, hitting $164 represents a compounded annual rate of almost 9%. Yes, most of it came from Trump’s tax cuts -- but it’s not like those were imaginary.

Strategists at JPMorgan Chase & Co. say consensus projections could end up being too conservative. A larger than normal proportion of firms have raised guidance for the year, wrote analysts led by Mislav Matejka, and improvements in activity momentum -- thanks to Fed cuts, further China stimulus, and a restart of the ECB’s quantitative easing -- could drive better earnings and margins going forward.

“The earnings outlook is actually one of the things that is positive for stocks going forward,” said Kate Warne, an investment strategist at Edward Jones. “Expectations are a little higher for next year and I think that’s appropriate because we begin to get into a period where companies aren’t facing such strong comparisons from the previous year.”

Solid sales growth in the second quarter is another promising sign, Warne said. “Companies are continuing to see good demand for their products even though they’re also facing rising costs.” Firms are expected to post revenue growth of close to 4% for the year.

Thursday’s 1.3% gain in the S&P 500 came as the yield on 10-year Treasuries jumped 12 basis points. Yields are still near their lowest levels since 2016 but their rebound signaled investors are more upbeat about the state of the U.S. economy.

Then, there’s unemployment, which at 3.7% remains near the lowest point in a half century. ADP Research Institute data showed U.S. companies added the most jobs in four months in August while jobless claims stayed low last week. Hiring at small businesses jumped by 66,000, a four-month high, the ADP data showed.

Even with the historically low rate, investors are universally expecting the Fed to keep easing. Rates futures traders are pricing in another quarter-point reduction at this month’s central bank meeting, and a total of about 64 basis points of easing by the end of the year.

“You’ve got central bank policy that has become much more accommodative around the world, including in the U.S.,” said Dave Campbell, a principal at the San Francisco-based wealth management firm BOS. “That continues to put us in this yield-anemic world of bonds but also reinforces the TINA market -- there is no alternative to stocks if you want to get any type of growth over or above inflation that’s meaningful.”

To contact the reporters on this story: Vildana Hajric in New York at vhajric1@bloomberg.net;Elena Popina in New York at epopina@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Chris Nagi

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