Market Strategy Radar Screen Weekly September 24, 2018

The Beat Goes On

From Trade “Tensions” to “Skirmish” to “War” to “Where to from here?”

Any way we look at it US stocks have remained resilient—though prone to rotations and rebalancing—as stocks have navigated between strong stateside fundamentals and concerns about unresolved and escalating trade issues between the US and China. The underlying worry is that this fracas could lead to a protracted trade war that could be damaging to the US and world economy.

While still few expect “protracted” from becoming the operative word, worries remained just beneath the surface of the market that last week reflected less concern about the noise surrounding the possibilities of a trade conflagration, but rather that they evidenced a very real consideration of the possibility that the louder and noisier the trade rhetoric gets the closer the world may be getting to a resolution of the trade issues.

Should such a resolution occur, we could envision the tone of the market revisiting where it was at the start of 2018 when the question was not so much if the global economic recovery could continue but rater how long it could run and how high stocks might go before the cycle turns.

From July 6th (when the first sizeable trade salvos were “fired across the bow” by the US) through last Friday’s close in New York, US and global stocks have gyrated; but they have also gained considerable investor attention bouncing between gains and losses when not being driven by improving economic and corporate fundamentals.

Consider that since July 6th (when the US tariff rhetoric against China began to heat up in earnest), the Dow Jones Industrials, the S&P 500, the S&am;P 400 (mid-caps), the Russell 2000 (small caps) and the NASDAQ (weighted some 40% tech or tech related) have moved respectively higher by: 9.4%, 6.2%, 2.6%, 1.1% and 3.9%. Counterintuitively, it’s been the large caps (many of which have global exposure) that have outperformed in this period.

From the start of the year through the close last Friday the Dow Jones Industrials, the S&P 500, the S&P 400, the Russell 2000 and the Nasdaq have moved respectively higher by: 8.2%, 9.6%, 7.4%, 11.5% and 15.7%.

The major international benchmarks as tracked by MSCI EAFE (Developed international equity markets ex-US and Canada), MSCI Emerging markets, MSCI Frontier Markets and MSCI World Markets ex-US since July 6th of this year have produced mixed results with MSCI EAFE and MSCI World ex-US respectively moving up 1.3% and 1.2% while MSCI Emerging Markets and MSCI Frontier Markets declined 0.8% and 2.5% (all foreign market returns are in US dollars). The weaker performance and losses in the international markets suggests to us that many foreign economies have greater dependence on exports and thus are more vulnerable in a trade war.

We note that the dollar has risen just 0.6% against the DXY index (a basket of six major developed nation currencies) since July 6th of this year when the trade skirmish began to ramp up.

The dollar from the start of the year through last Friday is up just 2.2% against the DXY index and is off some 2.6% from its high this year on August 14th .

Last week the dollar had its worst decline since March, slipping as much as 1% at one point, and ending the week off 0.74%. The decline in part stemmed from investor expectations that the Fed is getting nearer to an end if not close to an end of its normalization process. In addition, the euro was boosted by news that the ECB (the European Central Bank) is preparing to further taper its monthly bond buying program.

Are We “Over” the Trade War?

From our perspective on the market radar screen it appears that stocks stateside in particular are signaling much less worry about trade wars than an investor might have considered just a few months ago.

Is it complacency or a blind eye to the risks ahead? Or have markets already discounted the risks and are now focusing on what might come after trade war resolution. And might that have the potential to bring continued economic progress that could further feed corporate revenues and earnings for longer than skeptics and bears have yet to imagine?

More is to be revealed but for now we’ll take the markets’ signals as a sign that the outlook just might be continuing to improve—albeit not without challenges of some magnitude along the way.

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