Trump Trade Deal Optimism Driving This Market

Trump Trade Deal Optimism Driving This Market

$DIA, $SPY, $QQQ, $RUTX, $BAC, $VXX

US are stocks rallying this year on signs of progress in US-S trade talks as managed and sidelined money continues to bet that there is not much upside left when President Trump’s deal is reached.

That is wrong

Heffx-LTN’s corporate earnings and equity valuations model as of Saturday indicates that the market has priced in a soft deal, meaning 1 where just some of the issues get resolved in favor of US businesses.

In that scenario, the S&P 500 could rise an additional 10%+ when a hard deal is struck. That would take the index to as high as 3,100 from Fridays close, a mark that exceeds the September 2018 all-time high at 2,930.

If you listened to President Trump’s Rose Garden speech Friday he signaled a hard deal coming and the market rising to all time highs with it.

Both China and the US have expressed optimism over the progress during the negotiations this week, and BofAML (NYSE:BAC) pointed to a shrinking P/E multiple since tariff talks began last February, a sign of lingering fears over trade.

A hard deal with China means a brighter outlook for companies and the market, and a reversal of President Trump’s 2018 tariffs (he likes tariffs) all by itself would add 1% to the annual profit growth rate for S&P 500 companies.

“The indirect benefits to EPS from better growth, unleashed pent-up spending would likely be significant as well,” the BoAML analyst wrote in a note Friday.

Our senior economists, Shayne Heffernan, PhD expects a hard trade deal to be reached in 1-H of this year, as China’s financial markets are deep in Bear territory (-40%) and it economy is in a very painful state.

In the event of an all trade war we see a pull back of 8-11% in the S&P 500.

Below is how thing stack up as of today, as follows:

  • Hard Deal: President Trump removes tariffs imposed in Y 2018, China commits to more imports, IP right protection and enforcement measures in place, and full access to China markets by US firms; S&P 500 rallies 10%+ to new highs
  • Soft Deal: US maintains Y 2018 tariffs on imports, with strict oversight of agreed terms, China commits to more imports, some IP right protection plan, partial access to Chinese market; S&P 500 flat/unchanged pull back, and a buy the dip bounce to current marks.
  • All out trade war: US hikes tariffs on $200-B of goods to 25% from 10%, China responds in kind, and S&P 500 gives back lion’s share of its Y 2019 gains.

Pay attention, it is your money and so, your responsibility, always take what the market gives.

Have a terrific weekend

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Paul Ebeling is best known for his work as writer and publisher of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly-regarded, weekly financial market letter, where he enjoys an international audience among opinion makers, business leaders, and respected organizations. Something of a pioneer in online stock market and commodities discussion and analysis, Ebeling has been online since 1994. He has studied and worked in the global financial and stock markets since 1984.

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