Editor's Note: Jimmy Zhu is chief strategist at Fullerton Research. The article reflects the author's opinions, and not necessarily the views of CGTN.

Increasing numbers of investors are wondering what has been driving the global stock market to keep going higher in recent days, while the economic outlook paints a pessimistic picture. Heading into 2020, three reasons suggest that the divergence between the stock performance and economic outlook may continue.

Negative rates' environment may persist in 2020, forcing more traders to look for alternatives in the stock market 

Demand on investment-grade bonds surged earlier in the year due to the escalation in U.S.-China trade tensions and the slowing global economic outlook. By the end of August, those bonds offering a negative yield accounted for 30 percent of the entire investment-grade bonds around the world. Under this kind of low or negative return environment, many investors may have to search for other alternatives.

Flow analysis shows that those high-yield dividend stocks and defensive sectors started attracting more inflows and much of these flows could be from the bond market. The trend of increasing inflows from bonds to high-yield dividend stocks and defensive sectors is another key factor to support the stock market. In the first eight months of the year, the SPDR S&P 500 ETF outperformed its high dividend portfolio ETF by two percent. However, the high dividend portfolio has outperformed the SPDR S&P 500 ETF by almost one percent since early September.

A similar catch-up in fund flows went into defensive sectors as well. In the first eight months this year, the S&P 500 outperformed its defensive sectors by eight percent. From the beginning of September to now, the broad index has only been outperformed by three percent. If we are just looking at the performance for this month, the returns of the two are almost equal.

Moving into 2020, this trend looks intact regardless of where the growth is heading to. If the growth rate is to rebound, a further rally by stocks is almost certain as recession fears have been dominating the sentiment this year. On the other hand, should the growth continue to slow down, a further lowering of the bond yield wouldn't be a surprise, which means an increasing percentage of the bonds will join the club of the negative interest rates. Such an environment will induce more bonds portfolio into other markets for a higher return; those relatively safer high-dividend and defensive stocks will become the new safe-haven assets. 

Trade talks have formed a fixed pattern in the stock market, as traders know when to buy 

With the U.S.-China trade tensions been lasting for around one and a half years now, traders have found a pattern in the stock market. The market cycle has been repeated in this period with prices selling off on trade war fears initially, then followed by rallies after the two sides offered hope of a resolution or trade deal.

Now both the U.S. and China agree that a "phase one" deal is at the final stage without offering much in the way of details, but traders will not sell unless there is a "breakup" of trade talks again. The outcome of the negotiations is difficult to predict, but in our best-case scenario, progress on U.S.-China trade negotiation will continue to anchor the market sentiment in 2020. As long as there is no rapid escalation in trade tension between the two, traders are believed to follow the pattern this year – "buy stocks when talks are deadlocked and sell them when another round of deadlock re-emerges."

Evidence shows that there were also valid reasons for traders to buy stocks when markets were panicking in the past 18 months. When the trade war escalated in June last year, May and August this year, Citi Global Economic Surprise Index rose in all of these three months. A rise in this index means actual economic data is better than expected, which reflects that markets have been always excessively pessimistic on that negative news related to the trade war. Once the sell-off is overdone, both value-focused and speculative types of trades will be encouraged to buy the dips.

Traders have reasons to believe the theory that central bank easing is a friend to the stock market 

Broad-based rate cuts by central banks globally are another key driver that has been supporting stock prices, as suggested by the data in the past decade. Before 2019, global central banks conducted three rounds of synchronized monetary easing to counter the slowing growth after the Lehman financial crisis.

The first round of worldwide broad-based rate cuts started from the fourth quarter of 2008 and ended around the middle of 2009; the second round started from the fourth quarter of 2011, and the third started from late 2014. Stocks all gained after the central banks' monetary easing despite economic fundamentals remaining weak in those periods.

After all, massive worldwide central bank easing will largely increase the liquidity in the global financial system and these flows will directly benefit stock prices. Besides that, lower interest rates will also improve corporate balance sheets as business loans become cheaper.

Looking ahead to 2020, the market still expects major central banks to cut interest rates. Key central banks including the Fed, ECB, RBA, and RBNZ are expected to continue to cut rates in the second half of next year to arrest expected weak global demand.

Conclusion:

Falling bond yield may continue to force traders to seek a better return in the stock market, despite the ongoing soft growth activities. In a worst-case scenario, they believe that stimulus programs by central banks will always be implemented followed by a boost in market confidence. That's part of the reason that traders are always fearless about picking up stocks when the market is in a panic.

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