WAITING ON MAR-A-LAGO

Stocks gapped up at the open this morning following the Trump Administration’s announcement that it will further delay a scheduled trade tariff hike on Chinese imports. The Dow is currently up 157 pts and the SPX is up .45%. Cyclicals are leading the way—financials, industrials, tech, materials. And yet, the VIX Index is trading back up around 13.8. That’s not a high level, but one would typically expect the VIX to fall as the stock market rises. Commodities are mostly lower in early trading. WTI crude oil is down 3% today to trade around $55.30/barrel after President Trump complained to OPEC that oil prices are too high. I’m shaking my head in disbelief. If this isn’t proof that oil prices are routinely manipulated by traders and politicians, I don’t know what is. Bonds are trading mostly lower. The 10-year Treasury yield is back up around 2.68%. It has been trading between 2.65% and 2.70% for the last three weeks. As I mentioned last week, interest rate volatility has collapsed. By the way, Warrant Buffett says stocks are incredibly cheap if you think interest rates won’t skyrocket upward. If rates are relatively stable around current levels, stocks are attractive relative to bonds.

As expected, President Trump delayed planned increases in trade tariffs in order to give negotiators more time to seek a deal on trade. He said talks have been “productive” and he is planning a “Summit for President Xi and myself, at Mar-a-Lago, to conclude an agreement.” The longer this drags out, the weaker the Chinese economy becomes. Last weekend at a Politburo meeting, President Xi hinted that his government will focus on stimulating economic growth. Of course, we know that Chinese policy-makers had been concerned recently about skyrocketing debt used to fuel growth, using policy to reign in lending. But that was before the trade war took a bite out of the economy.

Bloomberg economists addressed the oddity of both stock and bond prices rising this month. They say it actually makes sense. First, bond prices are rising because the economy is stepping down from 3%+ economic growth, down to 2% or 2.5%. And this is causing corporate earnings growth to slow as well. We might actually see a quarter or two of negative year-over-year earnings growth. But crucially, rising stock prices are predicting a “soft landing” for the economy. Brief earnings recessions don’t necessarily lead to economic recessions. In fact, “there have been three occasions in the US where sustained soft patches in growth were followed by re-acceleration in GDP…” At the moment, there’s really no clear sign of impending economic recession.


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