Market Strategy 12/9/2019
We Can Work It Out
World markets remain hostage to mixed messages coming from the US-China trade negotiations
Key Takeaways
- With Q3 earnings season in the rear view mirror, investors this week are likely to focus on the Fed’s FOMC meeting and key economic data points crossing the transom.
- Last week’s market volatility to the downside (and by week’s end to the upside) provided something for every bull, bear and skeptic as trade war rhetoric, a weak ISM manufacturing index, and an outsized payroll gain for November vied for investor attention and emotion.
- Last week’s economic data illustrated slowing in the economy as well as underscored the resilience of the job market.
Midst trade war rhetoric and economic data last week stocks bounced between losses and gains providing something over the course of the week for just about every bull, bear, or skeptic.
The outsized unexpected gain in the non-farm payroll report for November and upward revisions to the prior two months’ jobs added helped right size attitudes and put stocks back on the good foot last Friday with the S&P 500 showing a modest gain for the week.
In the week ahead, the Fed’s FOMC meeting announcement scheduled for Wednesday will garner plenty of attention. Expectations held widely on the Street and among economists are for an announcement of no change in rates with most of the attention likely to fall on any hints from its tone as to what lies ahead for monetary policy.
From Tuesday through Friday there will be plenty of other data points as well that serve as signposts to consider when judging the health of the economy including gauges that measure small business sentiment, non-farm productivity, weekly and hourly wages, the health of the housing market, consumer and producer inflation, retail sales and import and export prices.
With just one S&P 500 company left to report results this week, Q3 earnings season is fast moving into the rear view mirror. As of last Friday the Q3 earnings season scorecard showed earnings off just 1.03% on the back of a 3.5% rise in revenue growth with 500 of 501 companies having thus far reported (see page 5 of this report for details). The bad news is that earnings growth fell somewhat in the latest reported quarter but the good news has been that earnings growth so far has come in better than the 4% drop that consensus analysis was looking for before the start of earnings season.
Stocks Near Record Highs
With the S&P 500 last Friday closing at less than a quarter of a percent away from its last record high reached on November 27, any positive surprises related to the trade negotiations between the US and China or good news contained in an economic data point or monetary policy utterance crossing the transom could see stocks move higher this week. Conversely any disappointment from either aforementioned points of interest to the market could see stocks move lower.
For now to the end of the year stocks could trade in a range in response to developments much as they “seesawed” last week as the stock market navigated the news, data and sentiment du jour.
With the Federal Reserve likely to have stopped cutting its benchmark rate for now trade negotiations will take center stage as the deadline for the next round of tariff hikes looms ahead (Dec. 15).
As we went to publish this edition of the Market Strategy Radar Screen news crossed the transom of an unexpected drop in China’s exports last month. According to the news report on Bloomberg, China’s exports fell 1.1% from a year ago versus expectations for a rise of 0.8%. China’s exports to the US were off 23%—underscoring the damage caused by the tariff war.
We’ll venture to guess (and keep our fingers crossed) that the US will find good reason to extend the deadline on the pending round of tariff hikes scheduled for December 15 to some date in the New Year. That would avoid another round of tariff hikes by the US followed by retaliatory hikes by China and allow both sides to stay focused on finding terms that’ll lead to getting some signatory ink on a Phase One trade deal before too much more time passes. Further protraction of the trade war in our view would serve neither side, and could do further damage to their respective trading partners and the world economy.
We continue to overweight US equities while maintaining meaningful exposure to international developed and emerging markets. We persist in favoring cyclical sectors over defensive sectors on expectations that a Phase One resolution to the trade war should serve to remove negative sentiment and projection that overhangs economies and markets around the world.
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