Stocks React To Speculation About An Interim Trade Deal

Trade Deal Could Spark A New Run Higher

It’s no surprise stocks rallied on Thursday because of President Trump’s positive tweets on trade on Wednesday evening. This is why you can’t just sell stocks if there are a lot of tweets. That study that showed a high number of tweets being associated with down days existed because most of the news on trade has been bad. 

If there is an agreement looming, each positive tweet will send stocks higher. The market might be at the beginning stages of a rally even though stocks have done well this year because a trade deal can catalyze an acceleration in growth. Best time to buy is when most think there is a slowdown, but results are turning.

As you can see from the chart below, hedge funds are positioned negatively just like in 2009. Merrill Lynch fund manager surveys have recently shown high bearishness, recession fears, and managers going overweight cash. There can be a large rally if the data turns. Global central bankers have been cutting rates. This stimulus could end the slowdown.

Near Record High For The S&P 500

On Thursday the S&P 500 rose 0.29% which put it at 3,009.57. The market us just 0.5% away from its record high. Now we move away from the discussion about how stocks haven’t done anything since January 2018 and back to talking about how great of a year this has been. S&P 500 is up 20.05% year to date. VIX fell again on Thursday as it was down 0.39 to 14.22. It’s no question the correction is over. It has been for a few days. 

CNN fear and greed index increased 8 points to 65 which is greed. It’s amazing how quickly the market can shift from risk off to risk on. This wasn’t a deep correction, but it did cause many to question if the rally was over because of the weak economic data and tariff announcements.

Nasdaq increased 0.3% and the Russell 2000 finally underperformed as it fell 4 basis points. A rally in regional banks actually continued as the KBW was up 0.22%. Underperformance of small caps may have held back small banks because the selloff in treasuries sure didn’t. 

2 year yield rose 5 basis points to 1.72% and the 10 year yield rose 3 basis points to 1.77%. It’s good to see the curve staying flat. This has been a quick sharp selloff in treasuries. Strong core CPI reading may have helped yields rise as the selloff started in the morning near when the report came out. We need to see a hawkish Fed for the near term part of the curve to selloff further and we need to see improved economic data for the long end of the curve to selloff further

With the continued selloff in treasuries, it’s no surprise the financial sector rallied as it was up 0.46%. The only down sectors were energy and healthcare which fell 0.63% and 0.12%. I don’t mean to suggest that the healthcare sector is only impacted by politics. But I will point out that the Democratic debate is this Thursday and Elizabeth Warren has seen a pop in the polls after the previous 2 sets of debates. Medicare for All would be a big change for the healthcare sector if it is adopted or anything similar is passed in the next few years.

Best 2 sectors were materials and real estate which increased 0.72% and 0.56%. Real estate rallied despite the rise in rates. Apple stock made an attempt at a record close, but fell at the end of the session to close down 0.23%.

Deal Or No Deal?

Speculation of whether an interim deal with China was being worked on caused volatility throughout Thursday. A deal would be some combination of America lessening tariffs and China respecting American intellectual property rights. It sounds like a deal where each side gets part of what it wants and trade goes back to normal. Technically, I just described what a regular deal would be because it would involve compromise.

I’m guessing an interim deal would be temporary and have conditions. We won’t know the details until one is made. Differing reports on whether the Trump administration is considering such a deal caused the volatility. First a White House official said “absolutely not” and then in the evening Trump said he would consider such deal. I can’t see why either side would be opposed to such a deal in principle. As usual, the devil is in the details.

Another Strong Jobless Claims Report

Jobless claims plummeted in the week of September 7th as they fell from 219,000 to 204,000. That’s the 2nd lowest reading of this expansion. Lowest was 193,000. If there’s any doubt the economy isn’t in a recession, that should be vanquished with this report. 4 week moving average fell from 216,750 to 212,500. This report suggests the monthly September labor report will show more job creation than August.

It’s worth looking at the non-seasonally adjusted data since this week included Labor Day. As you can see from the chart below, the claims of 159,300 were the lowest in this expansion. Since 2000, the average number of claims this week is 268,580. Ironically, in the week of Labor Day initial claims are usually low. They might increase next week, but it won’t be a big jump. Continuing claims from the previous week fell 4,000 and the 4 week average fell 14,500 to 1.68 million.

Conclusion

There shouldn’t be any resistance at the record high for the S&P 500. I see stocks breaking higher on news the trade negotiations are going well. There could be an interim deal made in October. If so, I will break it down in an article. Fed probably won’t turn hawkish yet next Wednesday. There won’t be a trade deal by then. Fed doesn’t want to look foolish by acting like one is coming and then needing to reverse course if it doesn’t.  

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