Stocks Rally On Trade Negotiations Which Are “At A Different Level”

Stocks Rally Again On Trade Talks

It seems like we are going around in circles with this trade situation. New tariffs tend to lead to new negotiations on trade. It’s a tap dance. This isn’t a no holds barred trade war where each side wants to destroy the other. Instead each side is issuing tariffs to gain leverage in the trade negotiations. The size of the impact definitely characterizes this as a trade war, but the way it’s being done make many viewers think a deal is coming. A deal is very difficult to achieve. However, with all these tariffs in place, if one doesn’t get done, the potential ramifications might be tougher to swallow than a compromise. In the short term, the stock market just wants the tariffs to go away, but after a few weeks the details of the deal will matter.

As I expected, negotiations are back on as the September tariffs are set to go into effect. In the long run, it won’t matter much if these tariffs only last a few weeks. Some businesses will eat the costs rather than passing them on to the consumer. This is why I say that these tariffs will have a big impact on early 2020 GDP growth rather than Q3. On Thursday, because of this optimism on trade, the S&P 500 rallied 1.27% putting it in the middle of its recent range. It is down 3.34% from its record high and is up 2.96% from its correction low.

Details On Thursday’s Rally

The Nasdaq was up 1.48% and the Russell 2000 was up 1.63%. The VIX fell 1.47 to 17.88 which signals the modest correction is still plodding along. While the September tariffs are in place, I can’t see the market hitting a record high unless traders see a very high probability of a trade deal. Economic reports might get worse because of these tariffs. The CNN fear and greed index increased 8 points to 26 which is only fear. The 5 day average put to call ratio index went from fear to greed. The market momentum reading, which looks at the 125 day moving average, went from extreme fear to fear.

Almost every sector increased on Thursday. The consumer staples index fell 2 cents to 622.31 which registers as no change when you round it to the hundredths place. Predictably, the best sectors were the industrials and tech because they are hurt the most by the trade war. They increased 1.77% and 1.73%. Treasuries have been selling off recently which makes perfect sense because they were very overbought. Plus, oil just had a 3 day winning streak (which was snapped as it fell modestly on Thursday). The 2 year yield is now at 1.53% which is 9 basis points above its 52 week low. The 10 year yield is at 1.51% which is 7 basis points above its 52 week low. It hasn’t hit its record low of 1.36% yet. Finally, the 30 year yield is at 1.98% which is 8 basis points above its record low.

Specifics Of Latest Trade News

President Trump stated the coming trade talks will be “at a different level” which means they will be more serious. He then stated, “Let’s see what the end product is; that’s what you have to judge it by.” The Chinese Foreign Ministry spokesperson Geng Shuang stated, “We hope that the U.S. can maintain calm, return to rationality, stop wrong practices, and create conditions for the two sides to conduct consultations on the basis of mutual respect, equality and mutual benefit.” These quotes sound better than the previous ones have.

The 2 sides are ready to get back to the negotiating table. So far, that’s meaningless because after every round of tariffs, the 2 sides have spoken and gotten some serious negotiations done. We need to see more before the market prices in a deal. That explains why stocks only rallied modestly. There will be a 3% rally on the day it becomes clear there is a trade deal. The S&P 500 will hit a record high as investors will assume the slowdown will end after the tariffs are nixed. That assumption is giving too much credit to the tariffs. However, I expect a cyclical upswing in 2020, which means instead of tariffs hurting an economy in a slowdown, a trade deal will help an economy at the beginning stages of an upswing.

Keep in mind, Trump’s statements on trade will halt over the next few days as Hurricane Dorian heads for Florida. How long he stops talking about trade will depend on how much damage the hurricane causes. There obviously can still be a deal, but we will go a week or two without hearing much in all likelihood.

Almost Final Q2 S&P 500 Earnings Results

Q2 earnings results are still trickling in as 5 firms reported earnings on Thursday. Dollar General, Best Buy, and Dollar Tree beat earnings estimates. The Cooper Companies reported GAAP EPS of $2.40 which missed estimates by 30 cents. However, it raised the low end of its EPS outlook. The only true weak report was by Ulta which reported adjusted EPS of $2.76 which missed estimates by 4 cents. Its revenue of $1.67 billion missed estimates by $10 million. Finally, same store sales growth of 6.2% missed estimates for 6.6%. Its stock fell 21.77% after hours. This news comes on the heels of the reports that Forever 21 is considering filing for bankruptcy.

494 firms in the S&P 500 have reported Q2 EPS results. Some firms have already started reporting Q3 results. 74% of firms beat Q2 EPS estimates which is exactly the same as the 3 year average. 58% of firms beat sales estimates which is below the 3 year average of 65%. As you can see from the top chart above, Q2 EPS growth fell to 3.94% from 5.28%. The trough of this downtrend will likely be in Q3 when growth will be just above the flatline. Q3 estimates haven’t been cratering, but growth is expected to be -1.07%. As you can see in the bottom chart, sales growth was above EPS growth in Q2 for the first time Q3 2017 which was impacted by hurricanes.

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