Market Strategy 11/04/2019
So Keep on Rockin' Me Baby
Key Takeaways
- Any progress in trade talks is likely to garner investors’ attention as earnings season moves toward its conclusion.
- Last week’s economic data on jobs, consumer confidence, GDP and inflation underscored the resilience of the US economy in times of trade war as a result of its consumers, rather than on manufacturing or trade, driving results.
- While Q3 earnings season has thus far been better than expected, estimates for the full 2019 year have now been cut just 7% since December 31, 2018 when markets were still reeling from the selloff in the fourth quarter of last year.
A confluence of better than expected economic data, Q3 earnings results, and a third 25 basis point rate cut by the Federal Reserve Board along with some encouraging missives surrounding trade talk progress helped push stocks higher stateside and worldwide last week (see pages 9 through 11 of this report for details
The economic landscape stateside in our view persists strong enough for positive data points to continue to offset negative data points when they cross the transom and overwhelm bearish projection pointing instead to an underlying resilience of an economy that is predominantly dependent on the consumer rather than on manufacturing in midst of a global trade war.
While some 20 months of the trade fracas between the US and China has raised concerns and delayed plans and investment among many businesses, it so far has weighed much less on the US consumer even as sentiment has somewhat softened (see details of last week’s economic data flow on pages 6 and 7 of this report).
Low inflation, low interest rates, increased hiring, modest wage growth and a strong dollar (the latter helping to offset at least some of the higher costs of imports affected by tariffs) have resulted in an extension of an economic scene that creates an environment good enough for the economy to move ahead (albeit at a relatively modest pace) and supportive enough for stocks to have continued climbing the proverbial wall of worry and grind higher to the repeated consternation of bears and skeptics.
Taken in context of the 19.78% decline in the price of the S&P 500 that occurred in 2018’s fourth quarter (driven by what we believe was erroneous and negative projections about monetary policy, the drop in the price of oil, and fear that difficult trade negotiations would disrupt the world economy interminably), the venerable benchmark in 2019 has taken a roundtrip back to where it once belonged and then some.
In such context the S&P 500’s run-up of 22.3% from the start of this year and 30.45% from the December 24th low through last Friday’s close, shows few if any signs of irrational exuberance or animal spirits but rather a market whose drivers reflect a period of economic history marked by extraordinary innovations in technology, the process of globalization and monetary policy stateside highly sensitive to both strengths and vulnerabilities in the economy.
We’re Not Out of the Woods Yet
In this new week we look for market participants to become increasingly focused on issues surrounding prospects of impeachment, political wrangling stateside ahead of the 2020 election, progress in trade negotiations, and another week of Q3 earnings.
We believe that the trade war is headed toward some kind of “Phase One” resolution as both sides allow reason to overcome ideological differences that are diametrically opposed and permit cooler heads to prevail. Failure to find a common ground on which an agreement could be reached would increasingly cost both sides and their trading partners much more than the acrimony of tariff hostilities are worth.
Meanwhile, Back on the Ranch…
We remain overweight US equities while maintaining meaningful exposure to developed and emerging international equity markets. Our expectations are that an improvement in trade relations between the US and China will substantially benefit international economies, particularly those dependent on exports.
Bonds on a broad and global basis remain richly valued in our view considering how low yield levels are from both nominal and real perspectives. That said, our expectations are for rates to rise only modestly when they do trend higher as inflation is likely to remain modest, kept in check by disinflationary secular trends driven by technology and globalization that lower barriers of entry to competition worldwide, limit commodity price gains, and contain wage growth inflation.
Our mantra of “no boom, no bubble, no bust, I’ll take it” stands for now.
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