FYI | Nov 19 2019
By Peter Switzer, Switzer Report
Stage set for stocks to spike
In my Saturday Report I talked about an expert tipping a 30% rise in stocks over the next couple of years. Some subscribers may have misinterpreted this as a view that I hold. I don’t know where the well-trained economist/portfolio manager, James White of Lessep Investment Management, got his 25-30% move for stocks over the next 18-24 months but I have to say it looks on the high side.
That said, I hope he’s right. I have to admit I’m waiting with bated breath for news that the US and China have signed a trade deal phase one. This has to be the second step in taking stocks up, where the Fed rate cuts this year were the makings of the first step.
The suspense is killing me as my publicly exposed predictions of the past year or so about where I think stocks are heading and what I’ve told our financial planning clients about the same subject rests on the signing and the words/tweets that follow.
Of course, the fear and loathing waiting for Donald Trump to seal a deal with the poker-faced Xi Jinping, was made more drawn out by Chile breaking out in protests over higher public transport charges. So a possible signing of a trade agreement must wait for a venue and, undoubtedly, openings in the diaries of two of the busiest and most important people in the world.
And while the overall market messages around a trade deal and what might follow remain strongly positive, we should never forget old maxims of the market such as “buy the rumour, sell the fact!” Who knows, the stock market might have already built in the expectation of ‘trade deal Mk I’ so a signing might not bring much of a bounce.
Caterpillar (CAT)
The chart above tells us that since August 16, this China-exposed company has put on 22%, powered by better trade deal news. However, in January 2018, before all this Trump trade war stuff, this was a $US170 company. So this number might talk to the potential of what a trade deal could bring to the stock market.
Amazon was a $US2,003 company around September 2018. It fell to $US1,377 by last December. It has now recovered to $US1,739 but still has upside. Bloomberg in June revealed that “Amazon has said little publicly about the trade war, [but]..behind the scenes, Amazon has agreed to pay some vendors up to 10% more for products affected by tariffs, according to two people familiar with the matter.”
And this is the point that shouldn’t be lost on someone like President Trump and his key economic advisor, Larry Kudlow. A trade deal should (and has to) turn around business confidence and bring forth investment or else the US economy, as well as the global economy, won’t get into the fast lane for growth. A credible deal will not only propel economies, including ours, but will take the stock market higher.
So we wait with “bated breath”, as I’ve already pointed out, but I didn’t tell you that this turn of phrase comes from William Shakespeare’s Merchant of Venice. In the play, both Antonio waited with bated breath for news about his ships that reportedly were shipwrecked. Old Shylock also waited with bated breath for repayment of his loan or the chance to extract a pound of flesh from his borrower!
Clearly, Donald Trump is in the ‘pound of flesh’ game as he extracts concessions from China but he’s probably reducing his planned amount of extraction as his impeachment proceedings become more threatening.
A looming trade solution as a means to stimulate the economy and the stock market has become a newfound priority for the White House. I suspect that only an opportunistic Beijing could upset the apple cart, which is telling me, for the stock market going forward, that we should believe that “she should be apples”.
However, recent economic readings on China suggest it’s not in the Chinese leadership’s interest to delay a deal, as the following shows:
- Fixed-asset investment in China fell to 5.2% in the 10 months to October on a year earlier (consensus: +5.4%), down from 5.4% growth in the nine months to September. It was the weakest annual growth rate since records began in 1998.
- The Chinese economy grew at a 6% annual rate in the year to September, which continues the recent downward trend but at the moment our northern neighbours are coping. This is CommSec’s Craig James’ take on the matter: “China is our major trading partner so its continued health is very much in Australia’s interest. While the economy has been buffeted by a trade war with the US, the fact that the world’s second biggest economy continues to grow at a 6 per cent annual rate is encouraging.”
It’s fair to say 6% is a good growth rate for the now second-largest economy in the world but any slowing of economic activity and income growth in China potentially could have not only negative economic effects but also political implications.
The protests in Hong Kong are rooted in economic concerns by younger people, who feel their futures are being hurt by the wealthy, local elite and Beijing.
- Chinese firms’ exports to the USA have fallen 25%.
Sure, China is buying elsewhere and Australia has benefitted (e.g. with LNG purchases) but overall the global economic impact has partially offset many of the gains.
Over the weekend, we learnt there is no date yet for a signing of the agreement, which Kudlow says is close and it looks like Trump and Xi don’t have to do the signing. “You know the two leaders may be able to put together a signing ceremony. Both leaders have said from time to time their top ministers could do it,” said Kudlow, reported in the South China Morning Post.
But Kudlow did keep the message positive by saying that the “phase one” deal is “making progress.”
For those wanting to believe my argument that being long stocks until at least March next year, makes perfect sense, remember these words from the Federal Reserve Chairman Jerome Powell last week. “If you look at today’s economy, there’s nothing that’s really booming now that would want to bust,” he said to the House Budget Committee. “In other words, it’s a pretty sustainable picture.”
And when he looked at the US debt and deficit situation, he used the highly emotive term “day of reckoning”, which he doesn’t see looming any time soon!
Adding to positivity and Germany just dodged a technical recession and Trump easing on tough tariff talk will help Europe, as a Brexit solution looks more likely with Nigel Farage and Boris Johnson forging a pact for the upcoming UK election.
I’m expecting a signed 60% trade deal will take stocks up because it takes away one more piece of uncertainty. But then Wall Street will ask: “When do we see the other 40%?” I reckon Donald will time that for some time over the election campaign, if not before.
The scene is set for stocks going higher and at this stage I’m good for 2020 but I’m not signing up for a 30% rise but I damn well hope James White is well on the money!
And clearly, I’m not into de-loading stocks right now.
Go James!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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