Last week’s rally in US stocks may just be the effect of a light volume/holiday week melt up, but the numbers were impressive and set the posts for last week’s action:
Although Friday’s Goldilocks-style Jobs Report played a role, this strong performance stands in notable contradiction to market concerns over global trade disputes. Given these have been brewing for months, they should now be bitter enough to make for a less appetizing US stock market. The tape respectfully disagrees.
All of which got us to thinking: what is the bear case for US stocks missing with respect to trade wars? A few thoughts:
#1. Investor uncertainty is keeping a lid on long-term Treasury rates. This helps support US equity valuations and also buffers stock prices from any incremental uncertainty over corporate earnings. Yes, trade wars should be inflationary as the price of imported goods rises. But as with equity price action, the market disagrees with this concern. A few numbers:
#2. Global interest rates are playing a supporting role here. While not enough to help overseas equity markets (All World Ex-US down 4.74% YTD), low yields elsewhere do seem to be putting a cap on US rates. For example:
#3. Worries over the economic spillover of trade disputes give investors some hope that the Federal Reserve will slow the pace of rate increases in the back half of 2018. Data from the Fed Funds Futures market December 2018 contracts:
#4. So goes Tech, so goes US large caps, and these companies have less exposure to US trade policy than most sectors. Facebook and Google are banned in China, and Amazon/Netflix have minimal presences. In Europe, the first two do face regulatory threats, but these predate trade war chatter. And Apple, the biggest Tech company of them all, seems naturally hedged by being a large employer in China and a systematically important part of the US equity market.
Bottom line: if Industrials (-4.6% YTD) were the largest weighting in the S&P 500, US market performance would look a lot more like the rest of the world. But Tech holds that spot, and its 26% weighting is enough to support the S&P 500.
Summing up: we aren’t trying to whistle past the graveyard on the tariff topic, but rather frame the discussion in a way that respects market action.There are two sides to every coin. You likely have read enough “Tails, you lose” about the effects of trade wars on equity prices. But so far US stocks are coming up “Heads”, and there are some logical reasons for that.
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