Wall Street Just Hit New Record Highs. Here’s Why.

Topline: Major stock market indexes hit fresh highs on Wednesday, as improved U.S. economic growth in the third quarter, solid consumer spending last month and renewed optimism on Wall Street over a trade deal with China have all dampened fears of a recession.

  • The S&P 500 was up 0.27% while the Dow Jones Industrial Average rallied 0.19%, helping both indexes continue a record-setting run that has seen several new highs over the past month. 
  • Much of the market optimism was due to stronger-than-forecast economic data, suggesting that the economy will continue its moderate pace of expansion in the fourth quarter.
  • The latest indicators showed that U.S. GDP grew by 2.1% in the third quarter—up from a previous reading of 1.9%, and also indicated that the slowdown in business investment could be stabilizing.
  • Economic prospects were further improved by a rise in U.S. consumer spending last month, while the number of Americans filing unemployment claims also fell, helping further diminish recession risks in the short-term. 
  • The robust economic data added to rising optimism on a trade deal with China, thanks to Trump’s comments on Tuesday that the U.S. was in the “final throes” of the important phase one agreement.
  • To add to the market’s recent rally, third quarter corporate earnings have come in better than expected: Of the 484 companies in the S&P 500 that have reported earnings, 75% have beaten estimates, compared to 18% that have missed, according to Refinitiv data (in a typical quarter, only 65% of companies beat estimates and 20% miss expectations).

Big numbers: So far this year, the S&P 500 is up about 25%, while the Dow has risen nearly 21%. The S&P 500 has hit more than 12 record highs in this past month alone.

Crucial quote: “Generally speaking, a string of new highs reflects both optimism and strong demand for stocks, and that trend is likely to continue,” Brad McMillan, chief investment officer at Commonwealth Financial Network, said in a recent note.

What to watch for: Recession fears seem to be on the back-burner for now, as U.S stocks will continue to rise in 2020—but at a more modest pace than this year, according to a recent survey by Reuters. The market will be boosted by more stable global growth, accommodative central bank policies, and a recovery in U.S. earnings, according to strategists polled. Among the biggest risks for 2020 are the presidential election causing political uncertainty or a further drawn out U.S.-China trade war continuing to hurt global economic growth.

Tangent: Despite optimism (yet again) over the signing of a phase one trade deal with China, Hong Kong has recently emerged as a point of contention. Trump has previously acknowledged that the protests there are a “complicating factor” in the ongoing negotiations. The Senate recently passed a bill to support protestors there, resulting in China accusing the U.S. of interfering in its domestic affairs. When asked in a recent interview if he planned to sign the bill in support of Hong Kong, Trump was unclear: “We have to stand with Hong Kong, but I’m also standing with President Xi.”

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