The stock market keeps setting new highs in a rally no one saw coming

The stock market keeps setting new highs in a rally no one saw coming

(**)(***)(****)Faced with an array of daunting headwinds and coming off a tough year, Wall Street took a dim view of stocks in (*********************). As a result, many major analysts missed one of the best years of this history-making bull market that continues to make new highs.(*****)(****)Of the (******)(************************************) forecasters that CNBC tracks(*******) for S&P (**************************) price, just three have targets that are above where the broad-market index traded Monday. The median 3,(*******************************************) target is 2.7% below mid-day levels with still nearly two months left to the year.(*****)(****)While the market’s path is always unknown and could come back down before the calendar turns to (********************), the year looks like an opportunity lost for those who bought into the pessimism. The S&P (**************************) continues to climb to new highs, while its sister index, the Dow Jones Industrial Average, also (********)set a new high-water mark(*******) Monday.(*****)(*********)(***)(****)The (**********)Dow(*******) is approaching an (***********************************)% gain for the year while the (***********)S&P (**************************)(*******) has gained close to (**********************************)% and even the small-cap Russell (**********************) is ahead more than (***********************************)%.(*****)(****)”I don’t think you can blame people for being a bit cautious or skeptical,” said Sam Stovall, chief investment strategist at CFRA Research. “If anything, earnings growth growth for this year has come down, and earnings expectations for next year have come down.”(*****)(****)Indeed, the S&P (**************************) is in the midst of an earnings recession that is on track to show the third consecutive quarter for negative year-over-year growth. Despite a (*****************************)% beat rate compared to expectations, earnings are still projected to a show a 2.7% decline in the third quarter, according to FactSet.(*****)(****)But it’s been more than that this year.(*****)(*********)(************)A range of opinions(*************)(***)(****)Wall Street has been spooked by concerns over a potential recession, the (**************)U.S.-China tariffs(*******) and multiple geopolitical concerns such as how Brexit will turn out.(*****)(****)Still, the market keeps going higher and defying the naysayers. The “most hated bull market in history” observation so often repeated on Wall Street may have become the worst cliche in bull market history as the averages continue to push into new record territory.(*****)(****)”You do wonder what is causing the market to go higher. One (*) is that the lack of alternatives continues,” Stovall said, citing the “TINA” belief that There Is No Alternative to U.S. stocks.(*****)(****)Stovall is among the many Wall Streeters who underestimated the market’s strength. He put a 2,(***********************) target on the market, but was by far not the most pessimistic. UBS is the lowest on the Street with a 2,(*************************) price target while Morgan Stanley has been consistently bearish with its 2,(************************) estimate.(*****)(****)In fact, Morgan Stanley is not only bearish on (*********************) but believes low returns will continue for the next decade due to high valuations. Andrew Sheets, chief cross-asset strategist at the firm, (***************)said returns will be “challenging”(*******) considering the set-up from the trailing price-to-earnings ratio.(*****)(****)On the other side, though, are strategists including Piper Jaffray’s Craig Johnson, who has been one of Wall Street’s biggest bulls for years and holds a 3,(****************************) target for the S&P (**************************). Though directionally right about the market’s moves, Johnson said “we weren’t perfect all along” in terms of timing, and he understands the skepticism about valuation.(*****)(****)”I think a lot of investors are struggling with valuation. The way this market has moved up, stocks have been pretty darn expensive,” Johnson said. “A lot of investors got caught off guard in Q4 last year. Those memories are still fresh in their minds about the big, dramatic selloff which wiped out a lot of bonuses for people last year. There’s that psychological impediment.”(*****)(*********)(************)Money to the mattresses(*************)(***)(****)The fourth-quarter sell-off last year was fueled by weakening economic growth coupled with a Federal Reserve that seemed tone-deaf to what was happening, Two verbal miscues from Fed Chair Jerome Powell that pointed to tighter policy ahead fueled the belief that a year when the market fell 6.2% could bleed over into (*********************).(*****)(****)Investors reacted by heading for cover.(*****)(****)Money market fund balances have surged this year to $3.5 trillion, the highest in a decade and up (**********************************).7% year to date. Retail investors alone have pushed $(***************************) billion into money markets in (*********************), a (*******************************)% jump.(*****)(****)Sentiment has been turning of late, though, if not among the big Wall Street houses then at least with the mom-and-pop crowd that has been cheered by (****************)three Fed rate cuts(*******) and a macro scenario that no longer looks as gloomy as it did a few months ago. Bullishness, or the belief that the market will be higher in six months, was at a (*************************************)-week high of (******************************).6% in the most recent American Association of Individual Investors survey, while the bears fell to (*********************************).3%.(*****)(****)Among professional investors, though, skepticism remains high.(*****)(****)The put-call ratio, a measure of sentiment among options traders, has remained above 1 since mid-September, a contrarian indicator that the market could be headed higher due to strongly negative sentiment.(*****)(****)”There’s worry that we are going to be disappointed by the trade issue, economic data and earnings,” said Quincy Krosby, chief market strategist at Prudential Financial. “Nothing stays the same forever. We’ve started to see an easing in all of the above. It doesn’t mean that’s the perfect scenario for the market, but it is perfect enough to get volume and breadth beginning to pick up.”(*****)(****)For the bulls, one of the big factors could simply be that the (*****************)signs of a recession(*******) that had shot up during the summer have been tamed.(*****)(****)The bond curve inversion, where shorter-dated yields were higher than their longer-term counterparts, has since reverted. Inversions have preceded each of the last seven recessions, but there’s some sentiment that this time could be different due to unusual factors playing out in the bond market, even though fourth-quarter GDP growth looks like it will struggle to top 1%.(*****)(****)In any event, lack of a recession threat would be one huge load lifted from a market that has struggled to inspire confidence all year.(*****)(****)”The tug-of-war has not died down. There are those who still see that there is a recession looming and the market is oblivious to that,” Krosby said. “The fact of the matter is the market is suggesting there is not a recession that’s imminent, that the market was poised for recession for too long.”(*****)(*********)(*********)(******************)(*******************)Read More(*******)

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