Dec 11, 2019

Axios Markets

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Situational Awareness: The Fed's rate-setting committee will announce its decision today at 2pm Eastern. No change in policy is expected, but traders will be looking for clues on the Fed's expectations for policy in 2020.

“There is always some kid who may be seeing me for the first time. I owe him my best.” - See who said it and why it matters at the bottom.

1 big thing: The end of the magic stock market

Illustration: Aïda Amer/Axios

The stock market's magnificent bounce in 2019 has been hard to explain and fueled largely by factors like stock buybacks and central bank easing.

  • But to see an increase in their share prices next year, U.S. companies will have to actually increase their earnings, experts say, a factor that's been notably absent from this year's rally.

By the numbers: As of Tuesday's close, the S&P 500 has risen 25% while U.S. corporate earnings growth has been negligible. Data from FactSet shows the S&P's earnings will likely be negative in every quarter this year — the first time it has fallen in four straight quarters since 2015–2016.

  • To be sure: Companies have seen earnings growth this year, but that has been almost entirely due to stock buybacks, Jill Carey Hall, U.S. equity strategist at BAML, tells Axios. "Pretty much all of it."

State of play: U.S. economic growth also has slowed, as businesses have cut back on investment and capital expenditures, and started boosting their cash holdings.

  • The market hasn't been fueled by a rush of irrational exuberance either. Traders have been net sellers of stocks in every month this year, pulling a record $130 billion from equity mutual funds and ETFs through the end of October, data shows.

What happened: 2019 was all about the rise in multiples, as the S&P 500's price-to-earnings ratio rose over the course of the year.

  • "The Fed was a big contributor" to that theme, Hall says, having cut already low U.S. overnight interest rates three times this year and added nearly $300 billion of bonds to its balance sheet.

What's next: In 2020, analysts expect the Fed to remain on the sidelines through the year and for multiple expansion to cool.

  • Gains in the stock market will come largely from U.S. economic growth and earnings, which fund managers at BlackRock see growing at 8%, combined with an average dividend yield that rivals the U.S. 10-year Treasury note and continued share buybacks from companies.
  • There are no expectations for a meaningful trade war resolution, just a ceasefire that allows the U.S. to grow "around trend," or close to 2% for the year.

The bottom line: "The handoff for growth that we see in 2020 is a meaningfully less powerful driver than multiples were in 2019, which is why the expectations for this coming year are more muted than we’ve seen in 2019," BlackRock's global chief investment strategist Mike Pyle tells Axios.

2. Catch up quick

The House Judiciary Committee is expected to vote on the two articles of impeachment against President Trump this week and send them to the full House for a vote before Christmas. (Axios)

Shares of Saudi Aramco jumped by the daily 10% limit when they began trading in Riyadh this morning after the company's IPO. (Bloomberg)

Nearly two-thirds of pension funds are considering dropping guaranteed benefits to new workers within the next five years, according to a human resources consulting firm Mercer. (Fox Business)

The U.S. government spent $49 billion more in the first two months of fiscal year 2020 than it did in FY19, the CBO estimated, with the budget deficit on pace to reach $1 trillion. (CBO)

The Swiss central bank could be forced to pull all investment from its $800 billion balance sheet out of fossil fuel companies in an effort to fight climate change. (Reuters)

3. The Fed may announce QE4 before year-end

While Wall Street consensus is calling for the Fed to remain on hold through December 2020, strategists at Credit Suisse warn the U.S. central bank may not even be on hold through the end of 2019.

  • They're expecting the Fed to begin its fourth round of quantitative easing before the end of the year in an effort to settle problems in the repo market.

Why it matters: The Bank for International Settlements concluded recently that the spike in rates seen in the repo market in September was due to a structural problem rather than a one-off issue. Consensus is growing that the Fed's daily cash injections are not enough.

  • Experts also warned earlier this year that the repo market issues were a sign of bigger trouble brewing in the broader market and could even cause a major selloff for U.S. stocks.

What they're saying: “The Fed’s liquidity operations have not been sufficient to relax the constraints banks will face in the upcoming year-end turn,” Zoltan Pozsar, managing director for investment strategy and research at Credit Suisse, said in the note.

  • Pozsar argued in his note that a full-on imposition of quantitative easing will be needed as the end of the year is a time when the repo market typically sees low liquidity.
4. Small business survey shows a record jump
Expand chart
Data: NFIB: Chart: Axios Visuals

Small business optimism posted the largest month-over-month gain since May 2018, rising to 104.7 in November.

The big picture: "Overall, this clearly is a positive report," Pantheon Macroeconomics chief economist Ian Shepherdson wrote in a note to clients.

  • "The headline index remains below its cycle peak, 108.8 in August last year, but that was supported by tax cuts and was not sustainable."

Yes, but: Sales expectations fell by 4 points to the lowest level in three years. "This might mean that firms recognized the impact of the August 1 announcement of tariffs on consumer goods was to pull forward spending into the late summer," Shepherdson added.

Of note: The surveys reflect the previous month's report.

5. Intel opens up about its (lack of) diversity

Intel revealed its racial and gender pay discrepancies on Tuesday.

What they said: Among 52 top executives at Intel, who all earn more than $200,000, 77% are white or Asian men and eight are white women. There is one Asian woman, one Hispanic woman, one black woman and one black man, with no Hispanic men counted among the top executives.

  • "The ratio was similarly skewed across manager, professional and technician job classifications, with white and Asian men dominating top pay groups and women and people of color clustered in the lower bands," Bloomberg noted.
  • "Intel’s report finds that within job types — not just at the top — white men dominate the highest salary band. Two-thirds of employees fall into a job group called 'professionals,' which includes includes non-managerial office workers and programmers."
  • "Nearly all earn at least $80,000 per year, but white and Asian men have the highest salaries. Black, Hispanic and other minorities are overrepresented in the bottom half of the pay ranges," per Bloomberg.

Why now: “It’s difficult to really fix what you aren’t being transparent about,” Barbara Whye, Intel’s chief diversity and inclusion officer and a vice president in human resources, tells Bloomberg.

"Joltin'" Joe DiMaggio was a legend, not only for his record 56-game hitting streak, which still stands, but Sports Illustrated notes "he also stole home five times, earned three MVP Awards, and is the only athlete in the history of American professional sports to win four championships in his first four years."

  • He retired from baseball on Dec. 11, 1951.