by Timothy D. Carkin, CAIA, CMT
Senior Vice President
While many eyes were on the impeachment proceedings this past week, we saw encouraging retail sales data and the prospect of a completed trade deal with China push equity markets to another all-time high this week. Even as these new highs are met, many investors have a bad feeling about the market. Nearly all prior market highs start with an exhaustive run to the top where you see good companies start to falter and turn down, while the index continues upward until finally, like a force pushing down, the market starts to fall. We saw that pattern play out in the beginning of 2000, again in 2007, and during many intermediate pullbacks in between. Fortunately, this long bull market has given us plenty of opportunities to view patterns like this; however, so far the market has merely consolidated, building up steam to continue the rally.
There is Still Good in the Markets
There are plenty of reasons not to give up on this rally. As stated before, retail sales are just the latest economic data points that didn’t disappoint. Once again, we think a trade deal with China is possible and if completed, it would bring the balance we have been looking for. Included in these new market highs are the highs in the industrial and financial sectors. Market rallies that don’t include these two tend to not to be as long and stable as those that do. In addition, the Merrill Lynch Fund Manager Survey recently showed cash levels for investment managers drop by the largest amount (5.0 percent to 4.2 percent) since the last presidential election to levels not seen since 2013. That same survey shows global growth optimism surging the most in 20 years.
Finally, the end of the year is typically good for equities. Since 1928, the month of November has seen markets be up 60 percent of the time with an average of 0.7 percent. December is even better, registering a positive return 72 percent of the time with an average return of 1.3 percent. This usually plays out as a rally into and out of the holiday weeks.
Source: Strategas
This has been a great year for the equity markets, but the last weeks of last year are still fresh in our collective minds as investors. We believe the equity market isn’t showing signs of an exhaustive top; rather, fundamentals are still constructive. No doubt we are watching closely for changes.
Week in Review and Our Takeaways
The impeachment proceedings haven’t deterred the equity markets from setting all-time highs
The last end of the year has historically been good for the markets