Still Runnin’ Against the Wind
By John Stoltzfus,
Chief Investment Strategist
Progress Not Perfection
If you try sometimes you just might find you get what you need
The US and China over the course of the G20 meeting in Buenos Aires managed to agree to disagree for now, but not without declaring a 90-day truce on tariff escalation/retaliation action. The effects of a truce period should provide investors some relief near term from the day-to-day concerns that have roiled the markets on the risk of a protracted trade war and the damage it could cause to global economic growth and corporate earnings over the course of the next year.
The hope is that both sides will make good use of the truce period to find resolution to the trade dispute and remove the negative overhang that has held international equity market performance hostage since the summer. More recently, this overhang fed the downdrafts in markets stateside that carried the S&P 500 down just over 10% from September 20th through November 23rd .
November ended on an upswing, after Fed Chair Jerome Powell and other Fed officials’ remarks on monetary policy quelled nervousness gripping some investors who feared monetary policy that might be too hawkish in light of recent economic data that has signaled at very least a decent chance of economic slowing.
How long it will take before the fear of “a Fed mistake” becomes “the worry du jour” again for investors is anybody’s guess. For now, it appears to us that the Fed remains on the right track, committed to interest rate normalization but at a pace sensitive to both strengths and vulnerabilities of the economy stateside
Over the weekend, the price of oil caught a bid and moved higher. Prospects for a return to a reduced production regime led by Saudi Arabia and Russia appear imminent. As to how high will this rally take the price oil—in our view ,it will likely be a function of the Saudis’, the Russians’ and other OPEC members’ commitment to return to the program that was successful in supporting the price of oil globally over the last year or so.
“Look for the pace of global growth (whether continuing to slow or ramping higher) to play a significant role as to how far oil’s rally can go. ”
Look for the pace of global growth (whether continuing to slow or ramping higher) to play a significant role as to how far oil’s rally can go.
We would expect a resolution to the trade war between the US and China to be highly conducive to an extended rally in oil prices—albeit not too much above the levels seen prior to the decline that began in October. However, the deeper into the 90 days of the truce period talks between the US and China run without resolution, the less likely we believe that a significant rally in oil prices can persist.
Oh But Then There’s the Fed….
The 10-year Treasury yield fell from a 2018 peak of 3.238% on November 8 to 2.989% last Friday. Likely this reflects concerns about economic slowing stateside and abroad, the potential risk from a protracted trade war on global commerce, as well as relief after Fed Chair Powell’s less hawkish remarks last week caused Treasuries to rally. Heading into the new week, yields on the 10-year US Treasury could recover some on prospects for a successful outcome to the ninety day truce on tariff escalation.
With the New York Stock Exchange closed on Wednesday in honor of the late President George H.W. Bush (who passed away last Friday), market action this week could be somewhat constrained going into and out of the market’s closure on Wednesday.
Nonetheless, the market’s reaction during this abridged week will be under the considerable scrutiny of investors, traders and market observers searching for a hint of its next direction.
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