Trade talks fueled market rise

Progress on China trade negotiations outweighed soft economic reports.

Significant progress on trade negotiations with China helped stocks continue the market recovery, despite soft global economic data.  Trade tensions with China is up at the top of the Via Nova Worry Checklist for 2019, so signs of an agreement have been positive for equities, not only for the large cap S&P 500, but also for small cap and international stocks.

The stock market has been strong over the past two months.  The S&P 500 gain lifted the index 19% above the Christmas Eve low, and the index currently sits less than 5% below the September 20 record high.  Increased market confidence has been reflected in the outperformance by cyclically-oriented stocks over the more defensive sectors.  Moreover, the potential strength and durability of the advance was evidenced by the outperformance of small cap stocks.  International stocks got a much-needed boost from news of progress in the China trade talks because of their reliance on exports. 

In other markets, Treasury yields held steady at relatively low levels on news that the Federal Reserve will remain “patient” regarding future rate hikes.  Comments from foreign central bankers that they likely will delay plans to gradually tighten monetary policy also helped steady yields.  While political discord has become the global norm, central banks have taken on the task of providing economic and market stability.  The result is lower interest rates which is good for both stocks and bonds. 

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  • Progress on China trade negotiations outweighed soft economic reports.

  • Trade talk update: progress with China but renewed tariff threats against the EU.

  • Softer economic data was concentrated overseas but may be affecting U.S. momentum.

  • The Week Ahead: Housing updates, North Korea summit and a first glimpse at Q4 GDP.

Reports that OPEC is cutting output and the sanctions against Venezuela have restricted petroleum exports and help lift oil prices, up 25% since the beginning of the year.  While the rise in oil prices will tend to lift gasoline prices for consumers, the current price level suggests oil companies will not need to cut back on production and initiate layoffs as they did in early 2016 when oil prices fell below $30/barrel.  Firm petroleum prices are a positive for energy stocks.  Inflation hedges, such as gold, Real Estate Investment Trusts (REITS) and Treasury Inflation-Protected Securities (TIPS) also rose for the week.  The value of the dollar slipped but is up modestly year to date and over 7% during the past year.  A higher dollar tends to lower import prices but makes U.S. goods less competitive in the world markets and thus is a potential headwind for corporate earnings if the trend persists.

Trade talk update: progress with China but renewed tariff threats against the EU.

Trade talks with China continued in the U.S. over the past week, and the unspecified progress between the two nations prompted President Trump to extend the March 1 deadline to raise tariffs.  The President also announced plans to meet with Chinese leader Xi Jinping in March to complete a broad trade agreement.  The current round of negotiations was extended over the weekend, which is a strong sign that both sides want to reach a deal.  While there is a broad range of trade goals on the agenda, reducing the trade deficit with China has been a major campaign goal of Mr. Trump.  If the U.S. can cut the trade deficit with China by as much as half, which is very possible, Via Nova estimates this feat could add nearly 1% to GDP.

Of course, it is a rare week when all the trade news is positive.  The President threatened to impose 20% tariffs on EU autos if a trade deal is not reached soon.  Tariffs were delayed last July to allow time for the two parties to negotiate, but six months later, progress has been scant.  Deadlines seem to generate more earnest negotiations, and the President is expected to set a 90-day cutoff for progress.

Softer economic data was concentrated overseas but may be affecting U.S. momentum.

While the risks of a recession here in the United States are relatively low, manufacturing surveys overseas have turned negative, which in turn could dampen demand for U.S. exports.  The latest manufacturing surveys from Markit Economics showed contraction readings in the EU, Japan and China.  Manufacturing also softened here at home, according to the survey, but remained comfortably in the expansion zone.  Home sales weakened in the latest report from the National Association of Realtors, but initial jobless claims, a leading economic indicator, remain at a historically low level suggesting a firm labor market and a healthy consumer.

The Week Ahead: Housing updates, North Korea summit and a first glimpse at Q4 GDP.

With fourth quarter earnings season winding down, the market focus is likely to turn back to the economic data.  First, Fed Chairman Powell will deliver the semiannual Monetary Policy Report to Congress.  While the questions tend to be more politically oriented, the Chairman could provide fresh insight on the Fed’s thinking about the economy and the near-term direction of monetary policy.  Expect to hear the word “patient” more than once.

There will be several reports on the current state of the housing market, but the Pending Home Sales Index from the National Association of Realtors will be the most forward looking and useful for analysts.  The recent drop in mortgage rates could provide a boost to housing.  The first estimate of fourth quarter GDP is also due.  The consensus estimate of 2.5% growth is slower than the pace for both the second and third quarters but should cap a relatively healthy year for growth.

Finally, the President plans to meet with North Korea’s Kim Jong Un in North Vietnam.  Since progress in persuading North Korea to end its nuclear ambitions has been exceptionally slow, expectations for a breakthrough are very low.  Still, meeting and talking is good thing.  Fingers crossed.