Bank of America Merrill Lynch has just published a new survey of institutional money managers and found an interesting sentiment among those managing a hulking mass of American money. That finding is that money managers are much more worried about the election than they are about the trade war. Institutional investors think election worries will have a much greater effect on markets than the trade war will. The chief US economist at Goldman Sachs summarizes the situation this way, saying “While there are no obvious signs of election-related effects on economic activity so far in this election cycle, there is some concern that . . . uncertainty could have a more noticeable effect on sentiment and activity as the election approaches”.
FINSUM: We absolutely agree. The trade war seems to be cooling as both sides appear as though they want to hash out the issues. The election is an event with potentially hugely variant outcomes and it is highly difficult to predict. This all means it is hard to price, and that uncertainty can weigh on companies and markets.
It has been more than 18 months of brinksmanship in the making, but the US and China are apparently set to seal a phase one trade deal. The deal will be signed at 11:30 am in the White House. The deal leaves out a lot of the most difficult and contentious issues between the countries, but is a sign that things are improving. The FT summarizes the substance of the deal this way, saying “It commits China to making $200bn in additional purchases of US goods, including farm products, and other pledges on currency and intellectual property, in exchange for a small rollback in some tariffs and an indefinite hold on further punitive measures out of Washington”.
FINSUM: The key thing here is that both countries want this work out and this deal is a step in the right direction. We find this quite positive in the grand scheme of things.
All the worries about the economy seem so 2019 now, right? Wrong. A big new warning sign just came out of that all important sector that we love to worry about—manufacturing. New data shows the US manufacturing sector is in its worst shape since 2009, according to the ISM. The sector only accounts for 10% of the economy, but it has been suffering mightily as Trump has ratcheted up the trade war.
FINSUM: So the question is whether this weakness is just because of the trade war or whether it signals something more broad. We think it is primarily trade-driven. As a consolation, garbage stocks have usually done very well when manufacturing is weak, according to Barron’s.
Wall Street analysts area all over the map about where stocks are headed next year. Some firms are bearish (Morgan Stanley), some are neutral, and some are bullish. Put Bank of America in the latter category, as the bank says that stocks are set to surge in the first couple months of 2020. Calling the year “front-loaded”, Bank of America analysts say that the S&P 500 should rise by 5.2% by March 3rd. Michael Hartnett from BAML says that the combination of easing trade worries, diminished Brexit fears, and loose monetary policy should combine to cause a “melt-up” in risk assets.
FINSUM: We like this call. All the fears for the winter seemed to have ebbed, and there will be a few months before election worries really kick in.
If one thing is for sure about markets at the moment, it is that investors are less worried about the economy and less stressed about the chances of a bear market. That is exactly why the market is at risk. The market’s fear index, the VIX, jumped a whopping 16% yesterday, signaling some underlying anxiety building after a calm and positive stretch. One of the factors that is looming over markets is whether the tariff deadlines on China get delayed or not, which will be a sign of progress or failure on the trade deal. Further, fears over the election, and higher rates, are likely to dampen corporate spending and slow the economy.
FINSUM: Our worry is that the anxiety level at the moment does not seem to be matching the real risk, which ironically is when the chance of a market downturn is at its highest.