November 5, 2019
As we discussed in my October 11th Pro Perspectives note, when Trump stood in the Oval Office and ceremonially shook hands with the Vice Premier of China, “the intent was clearly to signal the end of the trade war, to clear the overhang of uncertainty on markets, and move any further phases of negotiations to back burner issues for the global economy.”
With the evidence building that we’ll get a signed “Phase 1” deal, and with the fog of negative global economic sentiment slowly beginning to lift, it does indeed look like the handshake moved “trade war” off of the front burner.
You can see what stocks have done since that took place: virtually straight up, with 10 higher highs over 17 days!
For those wondering how far this can go? Keep in mind, with the removal of trade war from the global economy, we get to see what the unfettered power of fiscal stimulus, structural reform and ultra-easy global monetary policy can do for a U.S. economy that already has very solid fundamentals (record low unemployment, record household net worth, record consumer credit-worthiness, a record low household debt-service ratio, well-capitalized banks, low inflation, affordable gas).
For stocks, the question is, how much growth did a 21-month trade war “stunt”? We still have a forward P/E on the S&P 500 of less than 18, in an interest rate environment that should warrant north of 20 (if not well north of 20). And that doesn’t factor in the potential for rising earnings prospects in an environment over the next twelve months that won’t (we assume) have the overhang of an indefinite trade war. Just a 20 P/E on forward earnings gives us an S&P 500 north of 3,500.