Market Comment December 2019 22 Months of Trade Wars

It has been 22 months since Mr. Trump unleashed the trade war with China. He has singled out several other countries such as Brazil, Argentina, France and more. Are markets becoming too complacent? Markets have been very positive in the past few months with Europe picking up some steam to narrow the valuation gap. The markets no longer seeing a disorderly Brexit although the election in December may pose a threat to valuations in the UK. Instead, markets have been focusing on an improved economic environment in 2020 with better earnings prospects after 18 months of synchronized slow-down across major economies. Investors have also been cheered by a resilient US economy and corporate earnings. The bullish macro argument rests on expectations of a global economic upswing looming in early 2020, but another view and one hard to dismiss is that rallying equities reflect expanding central bank balance sheets in Europe and the US. Central bank liquidity gains credence as the principal driver of sentiment: a raft of technical indicators suggest that equity indices look overbought (on charts), and this applies to both US and European indices. Finally, implied volatility and related measures point to a very relaxed picture of risk aversion in the system. Disappointing economic data in the coming weeks may dent sentiment, although it appears equities will not really react to signs of weaker US and eurozone growth prospects until January. That focuses attention upon current trade negotiations and here, a record-breaking Wall Street may well encourage the White House to drive a harder bargain. Particularly as China’s equity market has been lagging the US in recent months and credit strains are becoming more notable. A current price/earnings ratio of 21 times for the S&P 500 entails a market vulnerable to negative headlines. In this regard, we would assess that stocks are taking quite a lot on trust at the current time and were a US-China trade deal to disappoint, or presidential impeachment to spook overseas investors, then a material retracement remains a real possibility before the year ends. Much can be discerned from market retreats and in this case, the underlying message for Wall Street and European equities is that their rallying trend since early October retains support. A bull run is noted for limited pullbacks as buyers quickly reload on weakness. This is not so good for the patient buyer of the dip, still waiting for a classic 10% correction to jump in. That will ensue at some stage, but a lagging performance by hedge funds and other investors implies pushing a stretched market only higher as the final month of 2019. The fundamental backdrop in US equities, bolstered by restrained inflation, low interest rates and a dovish Fed and moderate earnings growth, remains positive. In a striking divergence from this time last year, calm has ruled markets over the past month. However, we are always at the mercy of presidential tweets which can derail the market recovery at any moment. This is likely to lead to the classic 10% correction that we are waiting for as an ideal entry point into the markets.