Equity markets have had an excellent year so far after a very volatile 2018.
With the S&P500 up 20%, the Euro Stoxx 50 up 17% and the CSI 300 (the Chinese market) up 27%, those investors that benefitted from this rally recovered from the negative performance of 2018.
At the end of 2018, the biggest issue for the equity markets was the Fed hiking interest rates, which led to a spike in the US 10-year treasury to above the 3% level. This move sent alarm bells among investors as company borrowing costs would shoot up, leading to potential future earnings downgrades, which would most likely result in price targets being revised lower.
But it didn’t take long for the Fed to reverse its course, paving the way for a strong rebound in equity markets. Borrowing costs were no longer a concern with the US 10-year back down to the 2% level.
The truth is that the US economy is a ‘Goldilocks’ state – not too hot and not too cold. This is perfect for equity investors as the Fed would not be in a rush to withdraw its expansionary policies from the economy.
The Fed minutes
Federal Reserve officials were leaning towards an interest rate cut “in the near term” to address the risks to the economic outlook when they last met in June to set monetary policy, according to minutes released by the US central bank. This action by the Fed is brought about mainly by the uncertainties brought about by the US-China trade war.
US-China trade war
The high beta stocks and value names that have been impacted by the trade war could surge 10 to 20% if a deal is struck between the US and China. We are cautiously positive on stocks because we expect President Donald Trump to want to avoid a recession and have a strong stock market going into the presidential election next year. If there were a recession, it would be called the “Trump recession” since it would be largely caused by the trade policies of the Trump administration.
Gold
The key elements of the previous multi-year bull-run in gold included: producer buybacks, the introduction of gold ETFs, strong growth in China's gold demand, central bank buying, and a broadening base of investors. The current bull phase features central bank buying and investor interest, but not the other supports of previous episodes of strength. If global economic growth is much weaker than we expect, and the Fed has to cut towards the zero lower bound, investor interest is likely to broaden further and take gold much higher. That is not a part of our base case today.
Conclusion
President Donald Trump needs to cut a trade deal with China because his re-election prospects rest on keeping the stock market and the economy strong. He cannot afford to let that slip. He knows it. His political advisors know that. A year from now, we can’t be lower on the stock market than we are, and the US economy has to be better. So it’s up to Trump make a deal.
Disclaimer:
This article was issued by Kristian Camenzuli, investment manager at Calamatta Cuschieri. For more information visit, https://cc.com.mt/ . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.