The S&P 500 was back in record territory, as a tentative deal in the US-China trade war, and a months-long sell-off in bonds, have lifted investor confidence and spurred a rally in cheap, beaten-up stocks.
The equities benchmark was up 0.5 per cent Friday, giving it a shot at finishing above its incumbent record high close of 3,025.86 on July 26. At its high today of 3,027.39, the index was about 0.6 points away from its intraday record from that same session.
That brings the S&P 500’s advance for the year to 20.7 per cent.
The Nasdaq Composite sits about 1 per cent from its peak close of three months ago, while the Dow Jones Industrial Average is 1.3 per cent from its July 15 record.
Boosting the market late in the morning session on Friday were comments from the office of US trade representative Robert Lighthizer the US and China were “close to finalising some sections” of an interim trade agreement.
Growing concerns over the summer that Washington and Beijing were struggling to agree a deal on trade, thereby extending its dampening effect on the economy, and signals from the Treasury market flagging strong warnings about a possible US recession, had investors piling into haven assets like government bonds, gold and bolt-hole currencies.
Most notably, and against the backdrop of the Federal Reserve cutting interest rates in July for the first time since the financial crisis, yields on US Treasuries tumbled to multiyear lows. The yield on longer-term Treasuries fell below those of shorter-term notes, an inversion of the so-called yield curve that is regarded by the market as a possible predictor of an impending economic recession.
The UK’s exit from the EU remains a concern for investors. Although members of British parliament this week voted in favour of Prime Minister Boris Johnson’s Brexit deal, they did not back his plan for the UK to leave on October 31, reinjecting some uncertainty into the process.
While concerns of a brewing economic slowdown saw investors spurn equities as a whole, some segments of the asset class fared worse than others. Small-caps, regarded as more exposed to the domestic economy, underperformed large-caps, while defensive stocks and those that offered relatively higher dividend yields were in vogue and became expensive.
The divergences between some equities segments was stretched to historical extremes. The valuation of the small-cap-focused Russell 2000 fell to its lowest relative to large-cap equities since June 2003, according to Jefferies. Analysts at JPMorgan said their momentum indicator for the S&P 500 reached a maximal positive reading and that for small-caps reached its maximal reading, with such an extreme divergence occurring on only two days in history.
In late August, that all snapped back. Treasuries began selling off, sending yields higher. The yield curve has since turned positive after the Federal Reserve, despite cutting rates again in September, forecast no further easing this year.
With this rotation now in tow, value names have outperformed growth stocks by some way so far this month. An iShares exchange traded fund tracking value names in the S&P 500 has gained 5.8 per cent since the end of August, roundly beating an ETF tracking the benchmark’s growth stocks, which is up less than one-tenth of 1 per cent.
The proliferation of growth stocks, which are often tech companies, in the Nasdaq Composite is one possible reason why that index has yet to recapture its July peak, and sits 1.1 per cent shy of its record close.
Equities investors are also in the midst of earnings season, with 48 per cent of the S&P 500 by market cap having reported quarterly results as of October 24. So far, “Earnings are beating by 4.8 per cent, with 73 per cent of companies exceeding their bottom-line estimates,” Credit Suisse strategist Jonathan Golub said in a note.
All up, quarterly EPS growth for S&P 500 companies is expected to be down 0.8 per cent from a year ago, said Mr Golub, but is on pace for 1.1 per cent growth assuming a “typical beat rate” for the remainder of reporting season, he added.