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Up, Up, And Away


Image source: Nora Fikse @bynorafikse - Giphy, vkilikov, cherezoff - Shutterstock

What's going on?

The S&P 500 – a major US stock market index – has risen about 20% this year. And this week, it hit a fresh record high, suggesting investors are feeling pretty uplifted too (tweet this).

What does this mean?

Some of the reasons investors have been steering clear of risky stocks and cozying up to safer government bonds are starting to disappear – or at least not get any worse. Take the US-China trade war, which has increased costs and decreased demand at American and Chinese firms: it might be put on hold if the two countries can finalize their initial agreement next month. And in Europe, a further delay to Brexit – while prolonging uncertainty – decreases the likelihood of an unexpected and economically disruptive no-deal. Throw in the 80% of US companies that have exceeded investors’ third-quarter earnings expectations, and perhaps it’s no surprise stocks are suddenly back in investors’ good books.

Why should I care?

For markets: Dessert before dinner.

As many as 90% of investors expect the US Federal Reserve (the Fed) to lower the country’s key interest rate at its meeting on Wednesday. Cheaper access to money today should add up to more profit tomorrow, making stocks more attractive and bonds (and indeed saving) less so. Stock prices, then, tend to rise whenever the Fed announces lower rates. But now that they’ve hit record highs partly in anticipation of that announcement, another boost to prices probably won’t be as forthcoming.

Zooming in: Cyclical and defensive stocks are pushing markets up.

Stronger-than-expected quarterly updates from healthcare companies Pfizer and Merck pushed their stocks higher on Tuesday. That’ll benefit those investors who’ve backed “defensive” industries – those that sell products people need no matter the state of the economy. Likewise, carmaker General Motors’ stock rose after its update showed better-than-expected growth in the US and bigger plans to cut costs. That bodes well for shares of other “cyclical” companies, whose fortunes tend to rise and fall with economic growth.

Originally posted as part of the Finimize daily email.

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