INSIGHTS

On September 03, 2019

AAM Viewpoints – Macro-Themed Market Continues to Exhibit Durability

Bull markets often end when investor euphoria is pervasive. If this paradigm holds true for the prevailing cycle, plenty of upside should remain in this historically unprecedented advance. The recent knee-jerk reactions to escalating trade war tensions between the United States and China have effectively consolidated strong gains in stocks and sectors from earlier this year. Whether the topic has been tariffs, the European debt crisis, the financial crisis of 2007-2008, the Ebola outbreak or other impactful events over the course of this cycle, the stock market has not been derailed in its unrelenting quest to achieve record highs in a resilient and sustainable manner. Investor psychology today is one of only tepid optimism. 

Cycles often end when the Federal Reserve decidedly tightens monetary policy – often in response to hastening inflationary trends in the economy. Presently, the central bank’s data-dependent stance and its signaling of possible further rate cuts this year essentially removes the headwinds of monetary uncertainty. While there is heightened concern that the inverted yield curve may be a recession beacon, it is plausible from a technical perspective that stocks have largely discounted economic slowing based on last year’s fourth quarter 20% downturn and the more than 6% peak-to-valley decline sustained this August. Ultimately, a more insurmountable threat to the bull market might be robust earnings growth that could compel Wall Street analysts to boost subsequent forecasts beyond the reach of actual corporate results.

In this bull market run, consistent broad and diverse sector leadership provides an important underlying foundation for the uptrend. This is impressive given the advanced stages of this cycle. An early warning that a market top may be approaching can be inordinate concentrations of buying in a micro theme. This was illustrated in the last bull market when technology stocks drove market valuations to meteoric levels. The technology bubble eventually burst, ushering in a grueling bear market. It is impressive that much of the leadership that drove the market from its pivotal bottoms in 2002 and again in 2009 (after the financial crisis) remain intact today. Consumer discretionary, health care, industrials and information technology remain viable sector leaders and are accompanied by several other categories including communications services and utilities.

When recurring headline themes spur volatility, consider whether the accompanying storylines could meaningfully impact monetary policy or derail earnings growth. The market’s impressive and unprecedented resiliency may be trumpeting an important message to investors: There may be economic glad tidings on the horizon well beyond the imagination of those who are reliant upon current headlines and conventional wisdom for honing their investment outlooks.

CRN: 2019-0801-7588R 



The opinions and views of this commentary are that of Peroni Portfolio Advisors and are not necessarily that of AAM.