Need to Know: The cynics were wrong about China, and they might be wrong on value stocks too

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The current rally in U.S. stocks seems almost absurd. Apparently each day, some administration official trickles out a vaguely positive remark about the prospect of a tentative deal between the U.S. and China, and boom, stock markets end at records.

But that’s how these things work, says Fahad Hassan, manager of the U.S. Enhanced Equity Fund at Atlantic House Fund Management. “Resistance is futile,” he says over email to MarketWatch. “The markets anticipate a deal, and the stars seem to be aligning.”

Bears are frustrated. “The forward-looking nature of the markets always surprises the cynics,” he says. Third-quarter earnings for S&P 500 components, after all, are down. “This marks the third consecutive quarter of falling earnings, but as long as there is light at the end of the tunnel, the market can ignore the short-term negatives.”

One segment of the market beaten down at the moment is value stocks. Separate data from Goldman Sachs finds the price-to-earnings ratio of the top quintile of S&P 500 companies by valuation is 27. The price-to-earnings ratio for the lowest quintile is 11, compared with an average of 10.

Hassan said the lagged effect of looser monetary policy, a removal of economic road blocks and attractive valuations may cause investors to reassess their stance toward value stocks, and materials, energy and industrials sectors in particular. The final shoe to drop, he says, would be if the dollar DXY, -0.15%  fell. “While this seems implausible, a rising fiscal deficit in the U.S. and falling relative rates should lead to just such an outcome,” he says.

He says it makes sense to “slightly overweight” value stocks for a re-acceleration in economic growth next year, and he favors equities over bonds. As for the dollar falling, it would take an acceleration like that of 2015 to 2017 for the greenback to decline.

The buzz

The South China Morning Post reported that China needs firmer commitments on lifting tariffs from the U.S. before a so-called phase-one deal can be agreed.

Xerox XRX, +4.90%, the printer and photocopying company, is considering making a $27 billion bid for technology company HP HPQ, +2.22%, according to The Wall Street Journal. SoftBank Group 9984, +0.65%  didn’t have the greatest of quarters, reporting its first operating loss in 14 years, including a $4.7 billion hit on its investment in shared-office provider WeWork.

Chicago Fed President Charles Evans is due to deliver a speech and New York Fed President John Williams will answer questions, and jobless claims and productivity data are set for release. Lots of earnings are coming, with health insurers CVS Health CVS, -1.06% and Humana HUM, -0.75%  raising their earnings guidance.

Politics will be in the limelight after the Democrats flipped both houses of the Virginia state legislature, and Andy Beshear declared victory in the tight race for Kentucky’s governor.

The market

U.S. stock futures ES00, +0.00% were pointing to another quiet day after the 30-point gain for the Dow Jones Industrial Average DJIA, +0.11% on Tuesday.

The yield on the 10-year Treasury TMUBMUSD10Y, -1.05%  fell 2 basis points to 1.85%.

Random reads

Securities and Exchange Commission Chairman Jay Clayton “has been quietly chipping away at an array of rules,” according to this Reuters profile.

The U.S. Department of Agriculture is facing a complicated decision: whether to permit genetically altered trees.

A proposed law in New South Wales, Australia, would make it illegal to lie to get in bed with someone.

Deflation in everything—a man bought 1,000 hens for 96 cents.

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