Stocks staged a solid rally Friday and finished just a whisker below all-time highs.

Earnings and rumors that trade negotiations with China were going well spared the advance.

Here is what we have learned so far from earnings season. Overall, earnings and revenues once again show a slight upward bias against lowered expectations, consistent with what we have been witnessing for several quarters. The weakest sector to date has been multi-national industrials. For the most part, earnings have come in below already lowered guidance. But in almost all cases, a sharp initial drop in stock prices was reversed, a sign that the bad news had largely been baked into their stock prices. That isn’t exactly an all-clear signal. For that to happen, forward expectations would have to stabilize. But it clearly is a positive sign, especially if one accepts the notion that the economic slowdown is coming to an end and some signs of actual growth acceleration are starting to appear. On the other hand, bank earnings have been a bit better than expected. With the yield curve both rising and steepening, it is reasonable to expect improved fundamentals going forward. That has been reflected in some moderate price increases for bank stocks. This suggests banks could participate in further rallies. But the news, while good, isn’t exactly buoyant. Loan growth remains muted and the yield curve isn’t very steep, at least not yet. Thus, I don’t look for banks to be leaders if stocks make a charge to new highs.

We haven’t heard from many energy companies yet. The oil service leaders have reported, and their results remain punk. The big international oil companies mostly report later this week. The news will be ugly. The only question is how much of that is already priced in. If industrials are a good guideline, the answer is a lot. Retailers mostly have fiscal quarters a month later than most other companies. Therefore, they won’t report for another few weeks.

That leaves technology and healthcare. Technology results so far have been mixed. Results in the semiconductor world were mixed. Companies that serve the industrial complex had the most difficult time.

The bottom line is that results have largely been about as expected, maybe a bit better. That, by itself, is not enough to move stocks materially in either direction.

Next up is the Fed meeting that will conclude Wednesday. A 25-basis point cut in the Fed Funds rate is a foregone conclusion. What is in doubt is the future path in rates. While many want to hear that the Fed is leaning toward more cuts, beginning in December, it is likely that Chairman Jerome Powell will leave himself a lot of wiggle room relative to that option. If economic data continues to strengthen and the yield curve stays positively sloped, he could well keep rates flat in December and look to late January as a more opportune moment to consider cutting rates further. There is a significant minority of FOMC voting members who would like the Fed to stop cutting rates now. That coalition is still a minority, but it is big enough to carry a relevant voice.

On Friday, we start to get a lot of economic data relative to December, including the monthly employment report. I expect the pace of job growth to consider to slow gradually. The September number will probably be lower than the recent past. The government should break that number out so that economists can work with a relatively clean number. Monthly figures can be quite volatile. That is why I try to focus on rolling 3-month averages. That number should continue to come down for several reasons. First, it is taking longer for employers to find the right hire. Second, the number of openings is declining. While layoffs remain small, the lack of new jobs will impact the number of new hires. Third, the level of political and economic uncertainty remains high and could become more elevated next year if the Democratic candidate has a substantive chance of winning. Investments in fixed assets have 10-40 year lives. Short-term tax and tariff uncertainty will impact the decision-making process, lengthening the time needed in some cases.

Seasonally, we are entering the strongest time of the year for the stock market. Investors focus on 2020 prospects and, for the most part, they appear brighter than 2019. Mutual fund tax selling season is over and, with earnings reports soon in the rear-view mirror, corporations can start to buy back stock once again. The only obvious headwind is possible high liquidation requests from hedge fund owners. Hedge funds continue to underperform expectations. Most liquidation requests must be submitted before Friday. Funds will then have two months to meet liquidity needs. With that said, I think liquidation requests will be less than last year, when markets were already in steep decline. Similarly, given the overall strength in stocks this year, there will be less year-end tax selling. What there is will be concentrated in this year’s losers. As a result, don’t look for a rally in energy stocks, for instance, until well into December, if then. There also may be some selling pressure related to year-end rebalancing given the 20% rise in stocks so far this year.

While the path of least resistance is higher, without an upswing in earnings expectations or a resumption of the decline in interest rates, it is hard to see how stocks make a big, sustainable surge from here. Seasonal factors may feed some near-term optimism, but that probably isn’t sustainable. There is no obvious reason to be a seller here given current momentum, but I wouldn’t be an aggressive buyer either. Cherry picking among 2019’s weakest performers may be opportune as Thanksgiving approaches.

Joaquin Phoenix is 45 today. Brad Paisley is 47. Julia Roberts turns 52. Bill Gates is 64.

James M. Meyer, CFA 610-260-2220

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