Pro Perspectives 12/4/19

December 4, 2019

Yesterday we laid out the parallels between early October and these first few days of December.  The mood in early October, surrounding stocks (and the risk environment), soured on 1) weak manufacturing data, and 2) more hard ball from Trump, on trade.  We’ve had the same this week.  

And so far, we’ve had a similar response in stocks. First down sharply, then up sharply.

Why?  Remember, back in October, Trump ramped up the aggression against China, and it paid off.  Days later they were shaking hands on a deal. The S&P went on to 2% gain on the month.  

So, yesterday we get more tough talk from Trump on China, giving the appearance that he was blowing up a potential deal.   But as we discussed in my note yesterday, it looked like a repeat of his October tactic – to gain additional leverage, perhaps to get final details of a “Phase one” deal to swing his way.   That appears to be the case.  By last night, reports were saying Kushner’s recent involvement in the negotiations meant a conclusion was near, and there were reports that China was working out who to send to a deal signing (also saying it won’t be Xi). 

So we have this chart on stocks …

How much is a signed trade document worth to the stock market?  A handshake in October was a 7% move in 21 days (from the lows of October, to the end of the month).   

Remember, we’ve been talking about the 1995 analog all year long, where stocks rose as much as 36% on the year, as the Fed was forced to reverse course on monetary policy.  We’re seeing the same dynamic from 2018 to 2019.

With the above in mind, the S&P 500 closes today up 24%.  With a forward P/E still well below 20 and a 10-year yield of 1.75%, a 30%+ year is still in the picture.