This past week, the S&P 500 climbed 0.8%, to 3,093.08; the Dow Jones Industrial Average rose 1.2%, to 27,681.24; and the Nasdaq Composite increased 1.1%, to 8,475.31. All three are at their highest-ever closing values. The S&P 500 has risen for five consecutive weeks—the longest such streak since February. The Dow Transport Average leaped over 3% last week, confirming a bullish sentiment for Dow Theory watchers. Smaller-cap stocks lagged its peers, however, with the Russell 2000 up 0.6%. Thanks to some whispers of tariff relief, basic materials, technology and energy stocks led the sector list leaving behind safe-haven utilities, which gave back nearly 4%. Likewise, gold fell $46.70/oz. to settle on Friday at $1,461.30/oz. and real estate investment trusts were mostly negative.
The march to new highs has pushed the S&P 500’s forward price/earnings ratio to 17.2 times, the richest ratio since January 2018, indicating a possible overbought market heading into the final two months of the year. The Federal Reserve cut interest last rates at its October meeting, the third time since July to stimulate economic growth, particularly in manufacturing, which has been pressured by the continued trade conflict. Still, the Fed is suggesting that it may pause before lowering interest rates further, unless the economy loses additional traction. While the job market remains resilient as seen in employment growth and a small uptick in wages, manufacturing activity and business spending is declining. The non-manufacturing sector, while improving, retains pockets of weakness, which suggests that economic growth, registering just 2.0% and 1.9%, respectively, in the second and third quarters, may remain under pressure for some time.
A few more earnings reports are on tap this week: Cisco Systems (expected to have earned $0.81 per share vs. $0.75 in last year’s first quarter) and Applied Materials with an expected fourth quarter $0.76 compared to $0.97. Through it all, spirits remain high on Wall Street. Strong earnings, a responsive Fed, better trade news and the ability of this market to overcome periodic headwinds are pushing stocks steadily higher. While such optimism remains warranted with the investment fundamentals generally reassuring, a correction to adjust to more normal valuations, however, remains a threat.
Here is the answer to last week’s trivia question: The United States economy depends on trucks to deliver what percent of all freight transported annually? 55%, 62%, 70% or 78%. Answer: Nearly 70% -accounting for $671 billion worth of manufactured and retail goods.
Today’s Trivia Question: Which of the following companies is not a component of the S&P 500? Hess Corp., Goodyear Tire & Rubber, Paychex, Inc., or Tractor Supply Co.