At the close on Friday the market capped off a remarkably strong week heading into the end of the year with all three major indexes around record highs, up six out of the last seven sessions. Before you pop open the champagne in celebration, though, it’s a good idea to get a little perspective by taking a closer look at the drivers of the current rally. Friday’s run up was not without reason—there was positive trade news (passing of the USMCA trade deal with Mexico in the House and hints of a nearing China trade deal) along with a collection of strong economic numbers including better than expected Q3 GDP growth estimates. While these are very positive developments, the missing ingredient has been earnings growth, which has been largely flat for 2019 year-to-date. So this year’s impressive rally has been driven as much or more by sentiment and Federal Reserve stimulus than by fundamentals, boosting valuations to somewhat higher than average levels. On the other hand, the benefit of flat earnings is that they set a low bar for next year. If some of the major question marks for 2020 such as the presidential election and trade war with China are resolved favorably, then we could see a return to earnings growth help sustain the bull market.

Lackluster 2019 Earnings Growth

As the chart below indicates, the defensive sectors such as health care and utilities have shown some signs of life, while more economically sensitive areas of the market including energy, materials and industrials were down sharply and also fared worse than on the previous period ending 9/30.

Rally Boosts Valuations

While PE ratios are not wildly out of line with historical levels, the recent rally has left them somewhat elevated. Since the 10-year average includes the post-financial crisis period, that measure may have been somewhat skewed, but with the current ratio now exceeding the 5-year average as well, we will continue to monitor valuations going forward.

What We’re Reading

  • For Investors, the Past Decade was Marvelous. But that Tells Only Half the Story. As the 2010s wind down, and we get ready to usher in the 2020s, here’s a look back at what happened in the markets over the past decade that got us to this point.… (Article)
  • The Real Trouble with Silicon Valley. For the past two decades, we’ve funneled treasure and talent into the ethereal world of software and digital optimization. Imagine what could be accomplished if American ingenuity came back down to Earth and tackled more day to day problems in the physical world. … (Article)

Market Snapshot

For Week Ending 12/20/2019 (Cumulative Returns)1

Did You Know?

According to a 2016 estimate by The Economist, Mariah Carey earned more than $60 million in royalties from the holiday hit “All I Want for Christmas is You.” The song is Spotify’s most-streamed Christmas song of all time, with more than 602 million plays on the streaming service and produced more than $2 million in royalties from Spotify in 2019 alone.… (Article)

Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser.

1.Source – Morningstar, Inc. Global Stocks is represented by MSCI ACWI Index, Developed Markets is represented by MSCI EAFE Index, and Emerging Markets is represented by MSCI EM Index. Corporate Bonds is presented as the Bloomberg-Barclays U.S. Aggregate Bond Market Index. Municipal Bonds is presented as the Bloomberg-Barclays Municipal Bond Market. High Yield Bonds is presented as the Bank of America-Merrill Lynch U.S. High Yield Index. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate (NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.