US stocks set for best year since 2013

Wall Street poised for best annual performance in six years, driven by tech giants that have led the decade-long bull run.

US stocks are set for their best annual performance since 2013. Picture: AP

US stocks are poised for their best annual performance in six years, driven by the big technology companies that have led the decade-long bull market run.

An improving economic outlook, progress between the US and China on trade negotiations and three interest-rate cuts by the Federal Reserve have boosted investors’ confidence that the expansion can continue.

With one full trading day left in 2019, the benchmark S&P 500 has surged 28 per cent, while the tech-heavy Nasdaq Composite has risen 35 per cent.

Both indexes are hovering within 1 per cent of their record levels set last week and are on track for their biggest gains since 2013 when they climbed 30 per cent and 38 per cent, respectively.

Meanwhile, the 30-stock Dow Jones Industrial Average has increased 22 per cent -- its best performance since 2017.

The glad tidings were interrupted overnight (AEDT), though, as US stocks gave back some of their recent gains following a record-setting run. The Dow Jones Industrial Average dropped 0.6 per cent, or 183 points, the S&P 500 fell 0.6 per cent and the Nasdaq Composite lost 0.7 per cent.

The tech sector has led much of the US advance. The group has risen 47 per cent in the S&P 500 this year, by far the biggest gain among the index’s 11 sectors. It is responsible for 31 per cent of the index’s total return for the year, which includes dividends, according to data as of Friday from S&P Dow Jones Indices.

Nearly half of that came from Apple and Microsoft, which have surged 85 per cent and 55 per cent this year. The gains are particularly notable given those two companies’ heft; they are the two biggest US publicly traded companies with market values in excess of $US1 trillion each.

Other tech stocks, from memory-chip makers to payments processors, have joined the rally. Advanced Micro Devices and Lam Research Corp. have more than doubled in 2019, while Mastercard is up 58 per cent and Visa has climbed 42 per cent.

The gains were so broad -- about 90 per cent of the stocks in the S&P 500 have risen this year -- picking winners was easy, said Howard Silverblatt, the senior index analyst at S&P Dow Jones Indices.

“It’s dartboard technology,” he said. “Just throw a dart.”

Major indexes are ending the year in a very different place than they began. Stocks tumbled sharply to end 2018 on worries about slowing global growth, nearly ending the bull-market run. It took the S&P 500 six months to definitively erase those losses.

The turnaround was driven primarily by a shift in monetary policy at the Fed, which cut rates for the first time in a decade in July and lowered them again in September and October. Since then, the stock market’s gains have been broad, and the S&P 500 has set 35 record closes this year, the most since 2017.

“The end-of-year flood of liquidity that they provided us was wholly unexpected,” said Peter Boockvar, the chief investment officer at wealth-management firm Bleakley Advisory Group. “When the Fed is doing what they’re doing, everything looks good.”

That wasn’t the case in the spring when one of the most closely watched gauges of the economy -- the yield curve -- flashed a warning sign that a recession could be looming.

The yield on the 10-year Treasury note fell in late March below the yield on the three-month Treasury bill. Such an inversion has preceded every recession since 1975. It is a particularly ominous sign for banks because it affects a key profit barometer, the net interest margin, or gap between what lenders pay on deposits and charge on loans.

With the Fed cutting rates, though, the inverted yield curve became mostly a curiosity to investors. Yields on the 10-year note rose above those of the three-month bill in October.

Bank stocks were among the biggest beneficiaries of the supportive central-bank policies. The Nasdaq KBW Bank index has climbed 32 per cent this year, while Citigroup Inc. has risen 53 per cent, followed by JPMorgan Chase & Co. and Bank of America Corp., which are up more than 40 per cent.

Easing trade tensions have also been a boon for markets in recent months. For much of 2019, investors were captive to every incremental move forward, or backward, in trade talks between the US and China.

The market’s anxiety has lessened lately as representatives from both the US and China have said an initial agreement is near. But the tit-for-tat tariffs have weighed on global manufacturing data and capped economic growth.

“Manufacturing in the US and around the world is at best at the flatline and worst in recession,” said Mr. Boockvar of Bleakley Advisory Group. “It’s depressed growth.”

Others are more sanguine.

Nick Reece, a portfolio manager at investment-management firm Merk Investments, said the worst fears about the global economy and the manufacturing sector have abated. The US economy appears to be in a spot where gross domestic product is growing at roughly the 2 per cent rate it has had for most of the past decade, and earnings’ growth is expected to be somewhere in the high-single digits, he added.

“We’re plugging along,” he said.

The 2019 rally hasn’t been limited to US stocks. The Stoxx Europe 600 has gained 23 per cent this year and is on course for its best performance in a decade. China’s Shanghai Composite is up 22 per cent, while Japan’s Nikkei 225 has risen 18 per cent.

Traditionally safer assets like gold and bonds have also soared. Gold futures are up 18 per cent this year, their best performance in a decade, while a bond rally has pushed the yield on the benchmark 10-year Treasury note down more than three-quarters of a percentage point.

Even a market as usually quiet as muni bonds have been hot: The S&P Municipal Bond Index is up 7.3 per cent this year.

The strong rally, though, seems to be outpacing fundamentals, at least in looking at US equities.

Compared with the sharp gains in stock prices, companies in the S&P 500 have reported subpar growth in both earnings and revenue this year. Earnings per share growth will be just 1.4 per cent, according to FactSet data, down from 22 per cent in 2018. Profits are expected to grow 9.55 per cent next year.

The slowdown isn’t bothering investors, though. With low unemployment, low interest rates and strong wage growth, most observers expect the markets to maintain their trajectory.

“The market itself is a product of the continuing slow improvement in the economy,” Mr. Silverblatt said.

Dow Jones Newswires