View from the leaky boat to China View from the leaky boat to China http://www.federatedinvestors.com/static/images/fed-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\offshore-oil-platform-small.jpg July 15 2019 June 13 2019

View from the leaky boat to China

The journey toward a trade deal has been turbulent, but we eventually expect to see land and another up-leg for stocks.
Published June 13 2019
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Despite all the turbulence so far in our journey toward a trade deal with China, we remain bullish on stocks and are holding to our 3,100 forecast on the S&P 500 by year-end. We expect the two sides eventually will get there, but not without encountering a few more storms along the way. That’s why we recently took some chips off the table, lowering our stock-bond model equity overweight to 50% of maximum. This created some dry powder that we would expect to put to work if we get another pullback. What transpires on the four fronts below could well determine if and when we may get that.

  • Trade The decision to use tariffs to address the border crisis shook us along with many other investors. We were happy the president and Mexico walked this back quickly and think the likelihood of a recurrence is remote. On the bigger issue, China, we remain optimistic a deal can be reached and is in the interests of both sides. But with rhetoric heating up since the Chinese walked away from the deal that was nearly signed a month ago, it will take a warm meeting between the two presidents to turn the tide in a more constructive direction. We are very hopeful this will happen at the G-20 but acknowledge things might need to get worse in both China and the U.S. to bring Presidents Xi and Trump to the table.
  • Economy The trade wars clearly have extended the global soft patch that hit in Q1, leading us and everyone else to lower their forecasts for Q2. The middle syllable of Economy is “CON-fidence” and with the future rules of global trade now uncertain, it seems to be impacting investors’ and companies’ attitudes about investing longer-term. Confidence indicators have recently faltered globally and the industrial economic indicators are soft. China has been harder hit than the U.S. but Europe is a derivative play on China and it, too, is soft. It’s hard to say how much the terrible spring weather in the Midwest impacted everything here. The good news is the Federal Reserve (Fed) stands ready to cut if needed, and the housing market is starting to show signs of life, with mortgage rates down almost 100 basis points from last fall. Labor conditions also remain terrific, and this ultimately will drive consumption and growth. Bottom line, we expect the economy to hang in there at a low 2% run rate until we get a boost from the trade agreement.
  • Markets The sharp rally off December’s lows has brought us back almost where we were last October, before the correction. At that time, we were faced with the early stages of a global economic slowdown, an all-out trade war on several fronts, declining earnings estimates and signals from the Fed that it nevertheless was determined to keep hiking rates until it caused a recession. Now the underlying fundamentals look far healthier. Global synchronized stimulus has replaced global synchronized tightening. The global economy has stabilized though has yet to reaccelerate. Earnings estimates for this year also have stabilized. And bond yields are substantially lower, helping housing. “Only” trade is out there to fuel the wall of worry, but to be fair, it is a big wall of worry given how important it is to almost all companies around the world. Net net, with fundamentals OK but not perfect, we think the S&P is likely to trade in a near-term range between 2,750 and 2,900. But at some point, hopefully this summer, the U.S.-China trade situation should get clarified and with it, the economy and market should reaccelerate.
  • Politics This, I believe, is a fourth factor that increasingly will bear watching. In our analysis of the electoral vote, we think the only (remote) chance the Democrats have of retaking the White House is a fiscally conservative/socially liberal candidate such as Joe Biden. Someone from the party’s extreme left wing, on the other hand, would only make their 2016 losses in the Midwest worse, and would also remove any chance at Florida. So we are watching the polls as the summer Democratic debates get underway. If Biden starts sinking, which we think is likely, that will be market positive as the probability would rise of a continuation of the president’s economy-friendly regulation and tax policies. And, to the extent the Chinese are holding back on a trade deal hoping to “wait out” President Trump, a rise in Trump’s re-election chances would raise their incentive to do a deal now rather than later.

In just a few weeks, we should have more clarity on several fronts. We will know if Presidents Xi and Trump meet and how their meeting went. We will have a good idea of the Fed’s intentions going forward. And we’ll have the first wave of Democratic presidential candidate debates behind us, with potentially a clearer read on whether candidate Biden will hold his early lead. We are staying overweight stocks, just less so than we were when stocks were much lower. In the meantime, we will try to enjoy as best we can our ride on the leaky boat to China, hoping we see land soon.

Tags Equity . Markets/Economy . International/Global .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Diversification and asset allocation do not assure a profit nor protect against loss.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

Federated Global Investment Management Corp.

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