The S&P 500 Continues Its Record-Setting Run

The S&P 500 (Index: SPX) continued its record-setting spree in the first week of December 2019, ending the week at a new all-time record closing value of 3,145.91.

Although some market observers are claiming the S&P 500′s rising trend is attributable only to rising valuations, with the index’ Price/Earnings (P/E) ratio reaching up to its highest levels since 2001 without a proportionate increase in earnings, that’s missing the point that earnings aren’t what drive stock prices. Expectations for future dividends are what do, and they’ve been rising throughout much of 2019-Q4, with stock prices coming along for the ride.

As of the close of trading on Friday, 6 December 2019, we find the level of the S&P 500 is right in the middle of the range of the redzone forecast provided by our dividend futures-based model would set the index, assuming that investors are focusing on the distant future quarter of 2020-Q3 as they go about setting current day stock prices.

2019-Q3 has become a focal point for investors because that’s when investors are anticipating the Federal Reserve’s next action on interest rates, with the CME Group’s FedWatch Tool currently projecting at least a quarter point rate cut taking place in September 2020:

The FedWatch tool is also now projecting another quarter point rate cut taking place before the end of 2020, but it wouldn’t take much to move the probabilities enough to generate the anticipation of a half point rate cut taking place during 2020-Q3.

That’s not to say that investors will maintain their focus on that distant future quarter over all the time between now and its end. They could shift their attention toward another quarter in the future, such as 2020-Q2, which would address the market analysts concerns about high P/E ratios for the S&P 500, since that change in how far into the future investors are looking would be accompanied by a fall in stock prices.

Such a change would be driven by the onset of new information. Speaking of which, here are the major headlines we noted for their market moving potential during the week that was.

Monday, 2 December 2019

• Warning signs for U.S. economy:

• U.S. oil output growth slows: just how much is anyone’s guess
• U.S. factory sector contracts again in November: ISM

New tariffs, old tariffs:

• Trump, citing U.S. farmers, slaps metal tariffs on Brazil, Argentina
• U.S. may increase tariffs after WTO rejects EU claims over Airbus
• China wants rollback of tariffs in phase one trade deal with U.S.-Global Times

Bigger trouble developing in the Eurozone:

Euro zone factory activity shrank in November but worst may be over: PMI

Bigger trouble developing in South America:

• Chile’s economy posts biggest drop in decade as protests bite
• Argentine steel industry chamber says U.S. tariffs would hit production, employment

Chinese stimulus gaining traction?:

• China’s factory activity surprises with fastest expansion in three years: Caixin PMI

U.S. stocks retreat on economy and trade jitters

Tuesday, 3 December 2019

• Oil steadies after slide on Trump’s U.S-China trade comments
• Multi-front tariff wars and trade negotiations:

• Trump signals trade deal with China could be delayed until after 2020 election
• U.S. vows 100% tariffs on French Champagne, cheese, handbags over digital tax

• EU ready to respond to U.S. tariff threat on France: Le Maire

Bigger stimulus developing in Japan:

• Japan preparing $120 billion stimulus package to bolster fragile economy

Wall Street falls as trade hopes wane

Wednesday, 4 December 2019

• Oil jumps 4% on U.S. stockpiles drop; further OPEC output cuts seen
• U.S. service sector slows more than expected in November
• Trump to sign U.S.-Japan trade deal proclamation next week: trade representative
• Bigger trouble developing in Germany and China:

• German car industry expects more job cuts in 2020
• German services sector growth stays anemic: PMI
• China capex growth hits three-year low as weak economy, trade war drag

Bigger stimulus developing in China:

• China to implement more policies to stabilize jobs amid growing pressure

Wall Street bounces back on renewed trade optimism

Thursday, 5 December 2019

• Trade data and negotiations:

• U.S. trade deficit shrinks sharply; labor market tight
• U.S.-China trade talks are ‘on track’: Mnuchin
• Trump threatens trade action to spur NATO contributions

Bigger trouble developing in the Eurozone:

• Euro zone growth curbed by trade, retail sales sharply down

Bigger stimulus developing in China:

• World Bank adopts $1 billion-plus annual China lending plan over U.S. objections

Wall St. barely gains as investors wait for trade progress

Friday, 6 December 2019

• Oil rises sharply this week as OPEC+ agrees on deeper output cuts
• Strong U.S. job growth showcases economy’s resilience

• Returning General Motors workers seen boosting U.S. November payrolls

Don’t touch that dial! Traders see Fed on hold until after 2020 election

• Fed voters a less-hawkish bunch in 2020, lowering bar for U.S. rate cut

Reading the tea leaves in U.S.-China trade negotiations:

• Trump will make final call on China tariffs, likes direction of talks: Kudlow
• China to waive tariffs on some U.S. soybeans, pork in goodwill gesture

Bigger trouble developing in the Eurozone:

• German industry slump sparks renewed economic growth fears

Wall St ends higher after jobs report, trade optimism

Over at The Big Picture, Barry Ritholtz succinctly summarizes the positives and negatives he found in the week’s economics and market-related news.