Is The Trade Deal Back On?

Stocks Recover Some Of Their Recent Losses: Trade Deal Back On?

In a repeat of Monday’s manufacturing PMI data, the Markit services PMI improved and the ISM non-manufacturing PMI fell. Motor vehicle sales report rose after a weak October reading. ADP report was weak which only matters if it correctly signals weakness in the BLS report. All of that added up to a rally in stocks.

Stocks may have ignored this data and rallied because they were oversold and because of the latest trade headlines. It’s remarkable how quickly the trade news changes and how stocks buy into it. There are a few reasons why the stories change so often. 

Politicians try to use the media to negotiate. They also don’t want to hurt markets. Finally, they want to appeal to voters. That last reason applies mostly to America since China is communist. A deal would help President Trump in the 2020 election

The media loves to run new stories that differ everyday because they generate clicks. The stories move stocks which generates more clicks. It’s tough to believe the real news is actually changing by the day. Algos react quickly to news on trade even if it doesn’t make sense or comes from an unreliable source. There are some in the Trump administration who are consistently tough on trade and others who want a deal. 

Larry Kudlow always seems to be bullish on the possibility of a deal, so you can’t buy stocks because he says one is coming soon. The news report that supported stocks on Wednesday was from Bloomberg. The report stated, that Trump downplaying the December 15th deadline doesn’t mean a deal isn’t coming. It said negotiators expect a deal before that deadline.

Issues being negotiated are how to secure China’s purchases of U.S. agricultural goods and which tariffs to rescind. As the deadline approaches, trade news reports will come fast and furious, impacting stocks on most days. There are 7 trading days left before the deadline. This is a déjà vu moment as just like October, trade news and a Democratic debate could affect markets. 

Separately, China stated it would publish a list of “unreliable entities” which would lead to sanctions on American firms if the Senate passes the Uyghur Human Rights Policy Act of 2019 would require U.S. government bodies to report on the treatment of the Uyghurs in Xinjiang, China, including interment in the Xinjiang re-education camps.

Details Of Wednesday’s Action

Stocks reversed the recent 3 day selloff on Wednesday as the Nasdaq was up 0.54% and the Russell 2000 was up 0.7%. VIX declined 1.16 to 14.8. It’s back below 15 where it has mostly resided this autumn. Every sector increased except materials which fell 4 basis points. Best performers were the financials and energy which rose 0.99% and 1.57%. Energy rose because of the positive Bloomberg report on trade and the financials rose because treasury yields increased a bit.

10 year yield is at 1.77% which means it still hasn’t fully recovered from its recent 10 basis point decline. 2 year yield is at 1.57% which is 20 basis points below the 10 year yield. The curve is still flat. There is a 71.3% chance of a rate cut in 2020. I disagree because I see growth recovering slightly. 

Oxford Economics is calling for a rate cut in March. There is only a 26.2% chance of a cut by that meeting. A lot depends on the November and December retail sales reports and the November jobs report which comes out this Friday.

Healthcare sector was up 0.91%. Managed care ETF was up 0.95% which means it is down 1.36% from its record high on November 25th. Obviously, stocks have fallen since then. But the other reason this sector and industry have fallen is that Warren’s decline in the Democratic primary doesn’t matter as much. The sector’s explosive rally might be nearly finished because Warren’s candidacy isn’t as relevant. 

Future drops won’t matter as much. In the latest national Economist poll, Biden was up by 9 points on Warren. Her polling average has fallen from 26.8% to 14.2%. Her odds of winning have fallen from 53.4% to 18.2% as you can see from the chart below. She has fallen so far that if she falls further, it doesn’t matter as much.

Gains have been mostly been had in this sector and industry now that Biden is the favorite to win. The betting market shows Biden has a 24.9% chance of winning which is very low compared to his dominance in the national polls. Buttigieg has a 22.1% chance of winning. 

Biden and Buttigieg are considered good for managed care stocks, while Sanders and Warren are considered bad for these firms. Combined, Biden and Buttigieg have 47% odds, while Warren and Sanders have 34.2% odds. The biggest potential negative catalyst would be if Biden or Buttigieg came out with a left leaning proposal on healthcare.  

Costco Reports Great November Comp Growth

We are starting to get some numbers trickling in from Black Friday. Results should be good for winners like Target, Costco, Wal-Mart, and Amazon, while they should be weak for firms without an online strategy. Costco reported great November same store sales. 

This is consistent with the strong Redbook report from the week of November 30th. The firm had 5.3% same store sales growth which beat estimates of 4%. That’s even without Cyber Monday being in November. U.S. comp sales growth was 4.8%. Without gas and foreign exchange, same store sales growth was 4.3% which beat estimates for 3.7%.

It was a great Black Friday for Costco. Investors already expected Costco to do well which is why its stock didn’t react to this news after hours. The stock might still be up on Thursday. That after hours response might not reflect the next day’s trading action. 

These numbers aren’t just good for Costco. They mean consumer spending growth will likely be strong in November. I have been calling for a strong holiday shopping season since October. My prediction looks solid. Strong consumption growth could push Q4 GDP growth above 2%. 

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