Over the past month the harshness in trade negotiations has managed to subside with the current outlook remaining positive that the December 15th (set) tariffs will not take effect. With trade headlines and tweets being kept in check, the S&P 500 index has taken a leg higher creating new All-Time market highs.
It is our belief that these market highs have come primarily due to a change in Fed policy coupled with less chaotic trade negotiations. While the market continuing to push gains looks hopeful on a chart, the fundamentals of the market via an earnings perspective are slowing. Thus far, 92% of S&P 500 companies have reported earnings for 3rd QTR. Year over year growth is slowing with the current earnings being down roughly 2.3% (compared to 3rd QTR 2018). This marks 3 consecutive quarters of earnings decline for the index; an event that has not occurred since 2015-2016. While we would not over emphasize this point, it does mark a small cautionary flag. In summary, higher highs on the S&P 500 are becoming more expensive relative to earnings and therefore the risk of a decline is heightened.
As we have mentioned many times, the Relative Strength Index tracks these price movements and signals when markets are ‘overbought’ or ‘oversold’. Most recently the RSI was the most overbought since April 30th 2019 and higher than the level we saw before the October 2018 20% correction. For this reason we are forcing ourselves to remain patient. Chasing the market at increasing levels of risk is not our strategy. As Warren Buffet says ‘be greedy when others are fearful and be fearful when others are greedy’.
In today’s market action it seems these indicators we have mentioned are being felt. News broke around 12 pm central that perhaps the likelihood of a 2019 trade deal has been over played. With so many moving parts needing to align to resolve such a large issue we would not be surprised to see another recant from the assumed trade deal.