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The month of October concluded with the US Federal Reserve cutting interest rates for the third time this year – lowering its benchmark funds rate by 25 basis points to a range of 1.5% to 1.75% in a widely expected move.¹

With a slew of positive news and investor sentiments at an all–time–high, has the Santa Claus rally already started, and is there more room for growth in the following weeks?

Progress in trade war

As the trade war progress into its 18th–month, there seemed to be some respite from both US and China, with President Donald Trump first announcing last month that the two major powers had reached a “phase one” agreement on trade, though that pact has yet to be finalized, as well as discussions on rolling back tariffs even before a “phase one” trade deal is signed.²

Just last month, China pledged to buy as much as US$50 billion worth of US agricultural products and open up its financial markets further to foreign investors.³

U.S GDP grew faster than expected

Another positive catalyst to the world's largest economy is the latest US GDP numbers for Q3, which grew faster than expected at 1.9% but slowed slightly from the 2% pace in the second quarter. While the better–than–expected data was the result of continued consumer spending as well as government expenditures, business investment continued to decline amidst trade uncertainty and fears of a manufacturing slowdown.⁴

Earnings beat expectation

The recent corporate earnings announcement by companies in the S&P500 index was also much stronger than expected, with names like Netflix, Johnson & Johnson, and banking giants such as JPMorgan Chase, Bank of America and Morgan Stanley beating analysts' estimates.⁵

As of November 8^th, 89% of the companies in the S&P500 have reported actual results for Q3 2019 and 75% of them reported actual Earnings Per Share above estimates, with Consumer Staples, Healthcare, Information Technology & Financials leading the outperformance.⁶

S&P 500 Earnings Above, In Line, Below Estimates: Q3 2019 (Source: FactSet)⁶

On y–o–y earnings growth, it has been led by Utilities and Healthcare followed by Real Estate, Industrials and Consumer Staples, while Materials, Energy and IT experienced the largest y–o–y decline in earnings.⁶

S&P 500 Earnings Growth: Q3 2019 (Source: FactSet)⁶

Recession alarm switches off

Just few months ago, fears of a global economic recession sounded its alarm with the inversion of the Treasury Yield Curve (where the short duration yields were higher than the rates on the long end). Today, that has changed, and the bond market is actually signaling growth after the Fed cut rates three times this year.⁷

Did Santa Claus rally come early?

Those of you who do not know what is a Santa Claus rally, it is a sustained increase in the stock market that occur in the last week of December through the first two trading days in January.⁸

Since 1998, when the S&P500 is up by more than 9.5% through the end of first week of November, the market has seen a 4% further pop on average, and this has happened 10 out of 10 times in the past 20 years, according to Fundstrat.⁹

With the S&P500 up more than 23% this year and 4.1% since last month, perhaps the Santa Claus rally is already here. So do you still think there will still be a recession in the near term?

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