Do and/or Should Trade Negotiations Drive Market Performance
By David Crook
Chief Investment Officer
Over the weekend President Trump renewed tariff threats against Chinese products because he feels that the trade talks are not progressing at an acceptable pace. At ACG Wealth we question whether markets should react, as they do, to the developments with regards to these trade talks. The fact of the matter is that markets are reacting and have been for some months now and we need to be cognisant of what is occurring and then we will react, or not, to these developments and market moves.
Over the cycle though we should, more often than not, ignore these short-term developments and continually look at company performance within the markets that we are invested in or those markets that we are considering investing in. It is also worth noting that we refer to these negotiations as "trade talks" and not "trade wars" for the reason that the existing rules that China trades under with the U.S. were put in place well over 50 years ago when China was very much a developing economy and much has changed since then implying that the rules of trade need to change and, in our opinion, should have done so some time ago.
With nearly 80% of the S&P 500 now having reported Q1 earnings, we are seeing mostly upside earnings surprises relative to Street expectations as 72% of companies have beaten consensus estimates for the quarter(S&P Global, 5/3/19). On average, sales and earnings are up 4.6% and 7.2% respectively in Q1 (Bloomberg, 5/5/19). These results are in-line with our thesis of slower growth in 2019, but no recession on the horizon.
With the Fed holding off on further rate hikes and low inflation expecta tions, stocks have been on a tear this year. Through Friday May 3, the S&P 500 was up 17.5% year-to-date and has been hitting new all-time highs over the last week. While 17.5% would be a spectacular return for a full year, the market has achieved these returns in just slightly over four months! Given such a large move in a short period of time, we would expect the market to take a pause as valuations start to get stretched. We believe the recent news on trade negotiations could be the impetus for the market to digest some of its recent gains and potentially pull back slightly. However, we do not feel that a 1%-2% pullback in a single day or even a 5% pullback over a number of days is anything to be concerned with, especially given the large gains the market has made year-to-date.
We will continue to reassess our economic and market thesis as situations change and new data is released, but at this point we still believe that economic conditions are favorable for stocks even if we get a short-term pullback that puts the market more in-line with historical valuations.