Market Strategy Radar Screen Weekly April 09, 2018

Give Me a Little Sign

Markets await progress in trade negotiations and greater regulatory definition for social media

The markets could get some needed relief coming from the start of first quarter earnings season for companies in the S&P 500 this week. Any positive surprises tied to revenues and earnings as well as uplifting updates from the CEOs and CFOs reporting this week could provide the market some productive and healthy distraction from its near obsession of late with what hopefully will prove sooner than later to have been just pre-negotiation “shots across the bow” between the US and China on trade.

The markets’ recent nervous reaction to threats of tariff deployments that if realized could lead to a trade war that could prove disruptive to the US, China and the world economy was to be expected. Ultimately we look for a practical resolution to emerge that will lead to a more level and fair competitive trade environment than currently exists. The alternative of a trade war would benefit neither party.

The complexity of twenty-first century trade empowered by technology and globalization requires a universal update of trade agreements whose roots and intentions can be traced to the post-WWII Marshall Plan and an analog-driven world where the competitive edge in trade was defined by the wealth of developed economies and developed markets.

In the universe of trade that exists today things have changed dramatically due to the ubiquitous nature and accessibility of technology over the past 20 years. Today, relatively new companies from emerging markets accessing technology that is readily available can become the global competitive peers of long established developed market companies. This has resulted in imbalances that have disrupted economies, businesses, and the global labor force and caused great disparities in the distribution of prosperity amidst populations across the globe.

A contemporary approach to trade negotiations and treaties is more likely to succeed if the needs of all sides involved are considered and more fairly weighed to arrive at a platform that takes into consideration that all sides involved should give as much as they take.

Lopsided methodologies that call for one side to benefit more than the other side fail to recognize the effects of globalization and technology as drivers of trends toward greater interconnectivity and interdependence among trading partners that have debunked theories of a decoupling of economies that some had expected during the financial crisis and some still expect today.

For now investors will keep an eye on developments and any progress made toward negotiations between the US and China. Expect opportunities to surface even as risks emerge from the process.

Look to the Fundamentals

For now economic and corporate fundamentals in our opinion are not showing signs of deterioration. While last week’s non-farm payroll gain at 103,000 jobs added in March came in substantially lower than the 185,000 expected in an earlier survey of economists by Bloomberg, the number of jobs added in the month prior had substantially exceeded expectations.

Average hourly wages year over year released last week show an increase of 2.7%, in line with expectations and up from 2.6% year over year in the prior month. The headline unemployment number was unchanged at 4.1% and slightly higher than survey expectations of 4.0% in the aforementioned survey.

All in all the economy continues to show signs that growth persists at a moderate pace and is likely sustainable for the visible future. Our expectations are that such an environment should support the Federal Reserve’s efforts to continue normalizing interest rates.

Should consensus analyst expectations for S&P 500 earnings in Q1 to have grown by around 17% be realized the effects of measured increases in the Fed Funds rate are less likely to be disruptive to equities and even not as disruptive to fixed income as they might be under a more rigorous regimen of tightening.

Other key items that investors will be keeping track of this week include Facebook CEO Mark Zuckerberg’s appearance later this week before Congress and the release of the minutes from the Fed’s FOMC meeting last month.

While the resolution to the challenges currently facing the markets are not likely to occur over night, they are more likely to occur over a period of time in which progress not perfection weighs in favorably with investors.

For the complete report, please contact your Oppenheimer Financial Advisor.

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