Mexican Trade Deal Potential Creates Stock Market Rally

Mexican Trade Deal - Winning Streak Hits 4 Days

On the hopes of a Mexican Trade Deal, the stock market rallied again on Thursday. Which wasn’t what I expected to occur. The market can go against you at any time if there is trade news. It’s debatable if the news on the Mexican negotiations even was positive, but the market took it as such. 

S&P 500 rallied 0.61%, Nasdaq increased 0.53%, and Russell 2000 fell 0.22%. VIX fell 0.99% to 15.93. CNN fear and greed index oddly stayed at 29 which is fear.

As you can see from the chart below, at the bottom 4 days ago, pessimism almost hit the December low. That’s probably because the trade news was terrible and the economic reports were mostly bad. 

It’s good for the bulls that pessimism got so high even though the S&P 500 fell 6.84% at the trough. There isn’t as much fear in the market after this 4 day rally as the market has recovered about half of its losses. The S&P 500 is down just 3.47% from its April peak.

Obviously, it’s good news if there is a trade deal with Mexico, but that trade skirmish isn’t the main reason the economy is in a cyclical slowdown. The Mexican issue is a sideshow. I worried about it mainly because it meant President Trump wasn’t in the mood to work on a deal with China. 

Mexico isn’t in the same situation as China because 40% of its economy relies on America. Therefore, Mexico is much more willing to make concessions to make a deal. It wouldn’t be surprising if there was a deal, but a deal doesn’t mean the economy will start to roar in Q3.

Mexican Trade Rumors

Mexican Trade Deal - The latest news on the Mexican trade negotiations is that Mexico’s ambassador to America stated negotiators “had a very good discussion, a very good debate.” America is asking Mexico to keep Central American asylum seekers and require migrants to stay in Mexico for the duration of their immigration proceedings. 

There will be more negotiations at the State Department on Friday. On Wednesday, President Trump tweeted “Tariffs at the 5% level will begin on Monday, with monthly increases as per schedule. The higher the Tariffs go, the higher the number of companies that will move back to the USA!”

It’s good both sides are talking, but we won’t know if there is progress being made until after a deal is done. Stocks can easily fall 2% in the next few days if there isn’t a deal and the tariffs go into effect. Regardless of whether there is or isn’t a deal, the economy is still in a slowdown and I don’t think the market is properly pricing in the odds of a recession.

I’d only be a buyer of stocks here if there was a trade deal with China and positive economic data came out. There is speculation President Trump will wait for the Fed to cut rates and then strike a deal with China. So we might see an economic boom in 2020 right before the election. I’m doubtful of this. The only thing I believe is Trump wants to make a deal before the election so he can run on a deal. That would be his campaign message.

Solid ISM Non-Manufacturing PMI

Mexican Trade Deal - May ISM non-manufacturing PMI was shockingly good. It was 56.9 which was up from 55.5 last month; it beat estimates for 55.8. It beat the high end of the estimate range which was 56.5. Technically, this reading is below the 12 month average of 58.2. But it’s a pretty good reading for a slowdown. 

It’s not even consistent with a slowdown as it corresponds with 2.9% GDP growth. This is one of the few economic reports in the past few weeks that looks really good. Production index was up 1.7 points to 61.2 and the new orders index was up 0.5 to 58.6. 

As you can see from the chart below, the employment index was up 4.4 points to 58.1. It was the only component up year over year. This monthly increase was the biggest jump in 2 years. It’s not correlated with the ADP disappointment at all. Unlike the manufacturing ISM report, this prices index fell. It went from 55.7 to 55.4. Worst declines in this report were in backlog of orders and imports. They fell 2.5 and 5 points to 52.5 and 50.

Quotes from the non-manufacturing ISM report showed fewer complaints about tariffs than the manufacturing ISM report did. Specifically, a finance and insurance company said, “Our local economy is doing very well except for a large number of suburban office vacancies.” 

A retail trade company said, “We reported very strong Q1 results and raised our FY guidance. However, our stock has traded down due to the continued uncertainty in healthcare/Rx. There is a concern that tariffs on pharmaceuticals could be on the horizon.” There is some concern about tariffs, but the PMI reading showed it didn’t hurt their business. 16 of 17 industries in this report showed monthly composite growth.

May Job Cuts Increase

After a strong April reading, the May Challenger job-cuts report showed job cuts turned up again, resurfacing the worries that investors had earlier in the year when job cuts spiked. 

As you can see in the chart below, job cuts increased from 40,023 to 58,577. 12 month moving average increased to 51,641. In the first 5 months of the year, job cuts are up 39% as compared to first 5 months of last year. Layoffs have been the highest for retailers closing stores. 

Tech firms had the most layoffs in April. Layoffs at industrial manufacturers and automakers have been increasing. This shows the boost in auto sales in May probably was a blip.

Mexican Trade Deal - Conclusion

Pessimism rose sharply as stocks fell in late May. With this 4 day rally, pessimism has diminished. Personally, I think there should be pessimism because the trade war with China is still raging on.

And there have been numerous weak economic reports such as the 39% year to date increase in job cuts. 

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