Strong US consumer drives markets to all time highs with bears vs bulls battling

SPDR S&P 500 ETF SPY 2014-2019

I must admit, I thought that the bull market had surely run its course, but apparently not. The US S&P 500 has been red hot for years, ever since the financial crisis of 2008-2009 and the sub-prime fallout, its been a one-way ticket, up, up and away. This year alone, the S&P 500 is up 22%! If you’d bought an S&P 500 passive ETF in 2015, you’d be up 50% without dividends.

Last week the S&P 500 hit an all-time high and stocks like Apple have also hit levels never seen before. The US consumer is seemingly in good health, jobs numbers are solid and all looks rosy. Fears about global growth, the trade war with China and so on are taking a firm back seat. Stocks keep rising, but no one seems to believe it.

The US added 128,000 non-farm payroll jobs in October, down from 180,000 in September, but better than expected. The S&P 500 ended 1 per cent higher at 3,067, a historical high, on Friday. For the week, the index gained 1.5 per cent, its fourth consecutive weekly gain and longest winning run since March. The Nasdaq climbed 1.7 per cent over the past five days for its fifth straight weekly gain and longest such streak since May.

Market snapshot Nov 3 2019 @The Sunday times

Market snapshot Nov 3 2019 @The Sunday times

Bond yields on US Treasuries inverted earlier this year and the problems with overnight bank lending have meant that the Federal Open Market Committee (FOMC) cut American interest rates last week, by a quarter of one per cent, as well as increasing liquidity into the markets from $75 to $120 billion a day. The yield on the US 10-year was up 2.8 basis points to 1.72 per cent at the end of last week.

The Q3 2019, US earnings season has been pretty solid. Consumer discretionary stocks have done surprisingly well and economically sensitive shares like Apple, Google, Facebook, Amazon, semiconductors have reported good numbers. The US consumer is not worried about his job, his salary is likely going up and he/she is confident enough to buy that Winnebago RV/motor home (a big-ticket item), cruise or book a flight.

Winnebago Industies share price 2019
Wiinegago RV

With Billions of dollars of Trump tax cuts, low-interest rates, gigantic share buybacks, the global picture may look gloomy after all these years of stock market rises, but you can’t argue with the facts. At this stage of the economic cycle, investors should be piling out of consumer discretionary stocks and into safe havens like pharmaceuticals and tobacco to protect against downside and get yield from dividends.

Contrarian has been thinking of shorting the S&P 500 but the latest Q3 earnings have made me pause for thought. With a wall of cheap money from the Fed, the likelihood of another Trump presidency, putting America first, a catalyst for a stock market collapse isn’t around the corner. I believe that something will happen in 2020 as the Dow and S&P are looking expensive on a forward p/e of around 17-18.

Even the “Sage of Omaha” Warren Buffett is sitting on a mountain of cash in Berkshire Hathaway. Berkshire Hathaway grew its cash pile to a record $128 billion in the third quarter, as the conglomerate struggled to find large acquisitions. This could be a signal also that the assets for sale are not attractively priced and Buffett and Munger are waiting for a stock market correction to bring valuations down to more reasonable levels. During the financial crash of 2009, Berkshire used its cash to help banks like Goldman Sachs weather the storm and Dick Fuld, CEO of Lehman Brothers, tried and failed to try and get Buffett’s help in saving the bank from collapse.

In 2018, companies in the S&P 500 spent a record $806 billion buying back shares and 2019 has also been very strong. For example, Apple spent $18 billion in Q3. In the third quarter of 2019, companies are expected to spend $170 billion on their own stock. Quite a backstop.

The bulls are still confident of a trade deal between the US and China after a statement from the office of US trade representative Robert Lighthizer said he and Treasury Secretary Steven Mnuchin “had a constructive call today” with China’s vice-premier Liu He on phase one of the US-China trade agreement.

Contrarian is sitting on his hands whilst the US elections play out in 2020. Nothing ever goes up in a straight line forever and the US market has not had a proper 10% correction for years. It will happen but it will take investors by surprise. The bond markets are saying the party will end in 2020-2021, equity investors, for now, aren’t buying it. Investors continue to buy, buy, buy on a fear of missing out on the “Santa rally” at the end of each year.