Equity Commentary | November 2019

Published on Dec. 16, 2019

Equity Commentary | November 2019

Trade talks between the US and China continued to make headlines during November. China took several steps which encouraged investors that the likelihood of a near-term deal could be moving higher. These included raising penalties for intellectual property theft and making efforts to restrict sales of fentanyl into the US, thereby addressing two of President Trump’s concerns. Moreover, investor fears regarding any trade related blowback resulting from the Trump administration’s support of Hong Kong protestors were assuaged when China’s government announced that it would retaliate by sanctioning certain human rights organizations, as opposed to taking any actions that would directly affect trade talks.

Still, markets turned negative after President Trump announced at the recently completed NATO summit that a US-China trade deal might have to wait until after next year’s presidential election. We think that much of November’s stock market appreciation was driven by encouraging media reports earlier in the month that a phase I deal was nearing completion. This is based on our observation that trade- sensitive names did well, as did more volatile, global and cyclical stocks, perhaps implying that investors were making a bet that a successful trade deal would boost the manufacturing sector. We therefore expect that stocks would be at risk of at least retracing November’s gains should a trade deal fail to materialize.

In our view, the pending December 15th tranche of tariffs is the most important near-term issue pertaining to the trade negotiations. We think that stocks could weaken should the US impose additional import tariffs during the holiday sales period. That said, we believe that President Trump is quite sensitive to the stock market as well as economic activity, and therefore think it is more likely than not that this deadline will be pushed back should a deal not be reached by then.

Economic data has been mixed of late. The housing market continues to look robust, with new home sales for the combined September-October period coming in at the best pace in 12 years. Consumer sentiment, while off its recent peak, remains at healthy levels, and the latest reading of 3rd quarter GDP was revised modestly higher. The manufacturing sector, however, remains challenged. Industrial production declined by 0.8% during October, coming in below expectations, and the November ISM manufacturing survey remained at a level consistent with contraction for the sector. We think that this area of the economy continues to be hampered by trade tensions and the strong US dollar. Overall, we are encouraged that during the course of the year job creation and wage growth have been healthy, and with the appreciation in both stock prices and the housing market, we think that the holiday season could be a strong one. In this regard the early returns have been encouraging, with both Black Friday and Cyber Monday notching robust gains.

President Trump recently announced his intention to levy tariffs on certain French imports as well as Brazilian and Argentinian steel and aluminum products. The former is apparently in retaliation to France’s digital service tax on US companies, and the latter apparently in response to currency devaluations. While we do not think that these actions, in and of themselves, are material to the US economy, we do believe that they foster an uncertain business climate, creating challenges for both corporate executives and investors. We are therefore continuing to monitor these developments, as well as any other trade related issues that could impact capital markets, including Brexit, with an important UK election scheduled for December 12. Here at home, President Trump’s impeachment inquiry continues to dominate the headlines, though we maintain our view that this is unlikely to become an issue that will materially impact stocks.

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