Stocks Rally As Trump Softens Stance on Trade War

Stocks Rally - New 2019 High For The S&P 500

Stocks Rally - The stock market’s performance this year has been unreal. It appears investors realized there won’t be a recession this year, so they are buying stocks with reckless abandon. 

Valuations have gotten expensive because earnings estimates have cratered. I wouldn’t have a problem with 10% gains this year if I thought the current estimates for 5% earnings growth in 2019 were going to be hit. I think earnings will fall in the first 3 quarters and grow in Q4.

S&P 500 was up 1.29% on Tuesday, putting it up 9.49% for the year. It’s amazing that with such a vicious rally, the CNN fear and greed index is only at 67. The S&P 500 has moved above its 125 day moving average. 

Nasdaq was up 1.46%, Russell 2000 was up 1.27%, and the VIX was down 3.38%. 

The mini-decline last week has allowed the 14 day RSI to be below 70 as it is at 61.19. Stocks have been able to avoid being extremely overbought as measured by the technical indicators, but valuations will get absurd if stocks keep moving up. I think the best argument for U.S. stocks is that they are the best house in a bad neighborhood. China and Europe are slowing. 

However, in the long term America won’t maintain heightened valuations.

Stocks Rally - Industrials Outperform & Still No 2019 Hikes

All sectors were up except real estate which fell 0.7%. Materials and consumer discretionary were up 2.25% and 1.66%. Once again, the industrials outperformed as they were up 1.56%. Boeing was up 1.69% and Caterpillar stock was up 2.88%. Caterpillar is only up 4.98% year to date as global manufacturing growth is slowing.

Ordinarily, the odds for rate hikes increase with stocks, but the Fed’s dovish turn ended that possibility, which is great for stocks. 

Currently, there is an 81.4% chance of rates staying the same in 2019. I would be shocked if the dot plot from the meeting on March 20th shows anything but 0 or 1 hike this year.

Stocks Rally - Government Shutdown To Be Avoided

Surprisingly, it looks like there won’t be another government shutdown. That’s great news for those of us who analyze economic data because reports won’t be halted and the delayed data will come out in the next few weeks. The Q4 GDP report won’t be delayed again. 

Specifically, the bipartisan appropriators came up with legislation on Monday night that puts $1.4 billion towards border security. This includes 55 miles of fencing. President Trump stated, "The answer is no. ... I'm not happy (about the agreement). I don't think you're going to see a shutdown."

President Trump saying there won’t be a shutdown means he will sign the bill when it reaches his desk this week. Stocks never sold off because of the shutdown. But they seemed to have used this deal as an excuse to go up. 

The negative effect the shutdown had on Q1 GDP growth won’t increase. That shutdown will take about 0.3% off GDP growth.

Stocks Rally - No New Tariffs, Despite No Trade Deal

Just as I predicted, it looks like the March 2nd deadline for America to make a trade deal with China will be postponed. Trump is open to letting the deadline slide without adding new tariffs. 

There’s almost no chance a deal will be made by March 2nd, but there will probably be some sort of agreement in the next few months. The two sides haven’t drafted an accord on the issues they agree and disagree on. There is no scheduled meeting between President Trump and President Xi at the end of March.

The stock market liked the idea that Trump will be letting the deadline pass without adding new tariffs. Everyone knew there wasn’t going to be a trade deal by March 2nd, so that wasn’t negative news. 

Global economic trade growth will continue to slow, but that’s mostly because of cyclical weakness, not tariffs. The Chinese economy continues to be in very weak shape as the government expects just 6% GDP growth in Q1.

Stocks Rally - Disastrous Redbook Sales Report

The Redbook same store sales report was a disaster in rate of change terms. It doesn’t mean a recession is coming. But it does mean there has been a sharp slowdown in consumer spending in February. 

In the week of February 9th, same store sales growth was only 4.6% which was below the prior report which had 5.7% growth. This is the slowest growth rate in 8 months and is way below the peak in December which was 9.3% growth.

Month to date sales versus last month are down 1.8%. The full month year over year gain fell 1.7% to 4.6% which is the weakest reading since early September. 

This Redbook report supports the weakness in consumer sentiment. The good news is that the shutdown won’t restart, so that negative headline is gone. Furthermore, the trade war headlines won’t spook consumers. So far, the Redbook results haven’t been helped by the stock market. 

In fact, it has been the opposite as Redbook sales growth accelerated during the volatile Q4 as it peaked in December. 

Stocks Rally - Since the rally started, growth has been falling sharply.

Finally, because the shutdown is over, we will be getting the December retail sales report on Thursday. It should be strong since Redbook growth was strong then. The consensus anticipates 0.1% monthly headline growth and 0.4% monthly growth from the control group. That’s strong growth for the control group because it was 0.9% in November.

By the end of the week, we will have a very clear picture of what Q4 GDP growth will be when it’s announced on February 28th

To be clear, the Redbook same store sales report isn’t the ultimate arbiter of how strong the consumer is. The retail sales report and personal consumption expenditures are the reports used to calculate GDP. Redbook gives us an early look at the consumer. Since the government shutdown delayed reports, I leaned on it more. I won’t follow it as closely in the spring.  

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