This isn’t the trade deal the stock market was hoping for.
You wouldn’t know it from looking at the market’s performance this past week. The Dow Jones Industrial Average rose 242.87 points, or 0.9%, to 26,816.59, while the S&P 500 index advanced 0.6%, to 2970.27, and the Nasdaq Composite gained 0.9% to 8057.04. The Dow and the S&P 500 snapped three-week losing streaks, while the Nasdaq has now gained for two straight weeks.
But can we admit we had hoped for more, both from the market and the trade deal? This date has been etched in our calendars ever since it became known that President Donald Trump and Chinese Vice Premier Liu He were set to meet. We waited patiently through all the headlines—remember the Chinese delegation that canceled its trip to Montana?—for some real progress. And we hoped that when the deal came, it would knock the market out of the doldrums it has been in since late January 2018, when the trade war really heated up.
The deal that was reached, at least what we know about it so far, appears to be a cease-fire, not a true peace. China agreed to buy more U.S. farm goods, while the U.S. will hold off on placing new tariffs on Oct. 15. Trump called this “phase one,” and said “phase two” talks will begin immediately. Most of the thorny issues—including the fate of Huawei Technologies—appear to have been left for later.
Perhaps that is why the Dow, after charging up as much as 517.30 points on Friday, finished up just 319.92 points on the day. That suggests that the market knows that the trade conflict can heat up again at any moment—and probably will. “It’s not the end of the story,” says Carmel Wellso, director of research at Janus Henderson Investors.
That hasn’t stopped her from feeling pretty optimistic about the markets. Despite all the recent worries about the slowing economy and the possibility of recession, Wellso gets the sense the economy might be bottoming, though she thinks it may take another quarter before the market is ready to believe it—despite what’s likely to be continued tensions between the U.S. and China. “It may be the end of globalization, but regional economies will be fine,” she says.
First, we have to get through earnings season, which begins in earnest this coming week, with 52 S&P 500 companies reporting, including
Johnson & Johnson
(NFLX). Revisions to earnings-per-share estimates have gone from terrible in July to bad in October, according to Lori Calvasina, head of U.S. equity strategy at RBC Capital. “It is possible these [revisions] are telling us that earnings sentiment is bottoming,” she says. “But if recession fears keep rising, this indicator could make another move lower.”
It’s that tension—between the possibility of a trade deal and a full-scale trade war, between the prospect of a recession and a return to strong growth—that could keep the market moving sideways for a while longer. The S&P after all, has risen just 3.4% since peaking in January 2018.
And that may ultimately be good news for investors. Thomas Lee, research head at Fundstrat Global Advisors, observes that sideways markets have often presaged strong moves up: Twenty months of going nowhere was followed by rallies in 2015-16, 1983-84, and 1952-54. “This really strengthens our conviction that an upside breakout is coming for the S&P 500,” Lee says.
Trade deal or no trade deal.
Write to Ben Levisohn at Ben.Levisohn@barrons.com
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