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Ceasefire: Tariff Tailwind Injects Early Euphoria, With New Record Highs In Sight

JJ Kinahan

By now, we’ve all had a couple of days to absorb the weekend’s trade truce. The question is, with talks starting again and tariff threats receding for the moment, where does the market go from here?

The agreement President Trump and President Xi forged arguably takes a big chip off the market’s shoulder. The fact that Chinese tech giant Huawei can continue working with U.S. companies is likely to come as a major relief for semiconductor companies, and the Materials sector could get a boost from more U.S. ag sales to China. Stocks looked very strong to start the week in a relief rally that has major indices pushing toward new record highs and the Cboe Volatility Index—the market’s fear gauge—pulling back to the 13 handle as of Monday morning from above 16 last week. European and Asian indices climbed sharply early Monday.

The rest of the story, as the radio host used to say, isn’t necessarily so cut and dry. You could argue pretty convincingly that the market built in exactly the outcome it got, and was “priced for perfection,” as the old saying goes. Remember, Friday’s S&P 500 (SPX) close was just a few steps away from the all-time high posted earlier in June. Only a failure to extend the talks would have had a real impact on the market, according to this school of thought.

It’s also fair to say things are pretty much back to where they were in late April, with the two sides at the table again and the market bumping against new highs. The following month was when talks collapsed and the Nasdaq fell 10%. 

Until there’s more clarity about the two sides actually getting close to a deal neither will walk away from, it’s possible the market could continue to tread water after today’s euphoria. There might be hesitancy among some investors to get into big new bullish positions in coming weeks with the muscle memory of how things went the last time China and U.S. negotiators got together.

At the same time, it’s possible that hopes of a U.S./China deal and a Fed rate cut might help keep a floor under the market not far from recent lows. That could mean “sideways” trading for a while, or at least until earnings season starts in a couple of weeks and gives people something else to focus on.

Before G-20, Stocks Finished Solid First Half

Despite all the uncertainties surrounding tariffs, global growth, interest rates, and U.S. economic data, the major U.S. indices had a really solid first half. The double-digit gains, led by the Nasdaq’s (COMP) 20% rise and followed closely by the S&P 500’s (SPX) 17% returns, likely reflected growing hopes for a more dovish Fed and optimism on the trade front.

The stock market’s first-half performance largely seemed to factor out concerns that pushed 10-year Treasury yields down to 2% from nearly 2.7% over the same six months. Also, the market didn’t seem too fazed by a slight year-over-year slide in Q1 S&P 500 earnings. It was the best first half for the S&P 500 Index (SPX) in 20 years, and the best June for the Dow Jones Industrial Average ($DJI) since 1938, financial media reported.

Leading sectors in the first six months of the year included Technology, Consumer Discretionary, and Industrials, which all rose 19% or more and were led by 26% Technology gains. Every sector rose in the first half, but Energy and Health Care brought up the rear as the only sectors not to register double-digit improvements since Dec. 31. 

While the SPX is up nearly 17% year-to-date, it might help to look beyond that for perspective. Remember, the old year finished with Wall Street’s back to the wall after a nearly 20% plunge in just three months. A lot of this year’s rise just reflected a claw back from that decline.

Some sectors might see more positive impact than others today from the tariff tailwind. Semiconductors come to mind. So do some of the traditional multinational manufacturing companies. Some of the firms often seen as bellwethers for trade with China include Caterpillar Inc (NYSE: CAT) and Boeing Co (NYSE: BA). Retailers like Nike Inc (NYSE: NKE) and Technology firms like Apple Inc (NASDAQ: AAPL) also do heavy business with the Asian giant.

As the new week starts, it wouldn’t be too surprising to see a let-up in the Financial and semiconductor rallies. At least a decent portion of the gains last week might have represented end-of-quarter position squaring unlikely to continue now that Q3 is on hand. 

There’s no let-up for crude, which moved above $60 a barrel Monday as it appeared some key OPEC members attending the cartel’s meeting were leaning toward extending production cuts.

Bringing Up the Rear

Before last week ended, a couple of stragglers came in on the data side. One in particular looked a little concerning, though that doesn’t mean it’s necessarily time to hide the children.
The Chicago Purchasing Managers Index (PMI) fell below 50 in June, dropping 4.5 points to 49.7. That was much weaker than Wall Street had expected and the first time it’s been in contractionary territory below 50 since January 2017. Also, it’s down dramatically from a year ago when it stood at 63.8.

A weak Chicago PMI can sometimes reflect business uncertainty, and that’s definitely heightened in these times when the chance of more tariffs still hangs over everything. Chicago PMI isn’t alone, either, as other regional manufacturing indexes also have fallen in recent months. This could bear watching to see if slower business activity starts factoring negatively into gross domestic product (GDP) growth estimates.

The other data point Friday was University of Michigan sentiment for June, and it was a little better than the PMI data but down from May and flat compared with a year ago. The headline of 98.2 compared with 100 in May (which was an eight-month high). Consumer expectations did fall pretty steeply, and the five-year inflation gauge, which measures where respondents see prices going, fell to a record low of 2.3%.

Meanwhile, 10-year yields stayed under pressure to finish the old week right at 2% and near recent lows, while the dollar index remained just above 96. The decline in the dollar at the end of Q2 from peaks above 98 in May probably came too late to help Q2 earnings results, but if it stays down here or falls further, it’s possible some analysts might start thinking of factoring in a more helpful dollar as they look to Q3. 

Data in the days ahead include auto sales, construction spending, and factory orders. That said, most of those numbers probably fade into the background Friday when the government issues its June jobs report. We’ll talk more about expectations for that in the coming days.

Another thing to remember this week is that it’s a shortened one. The New York Stock Exchange (NYSE) and Nasdaq will close at 1 p.m. ET on Wednesday and be shut all day on Thursday for the Independence Day holiday. Normal hours return for both on Friday. Market Update will take a holiday break on Thursday before returning Friday for a timely analysis of the jobs data.


Figure 1: SEMIS IN SPOTLIGHT: Semiconductor stocks (candlestick) had an impressive finish to the old quarter after getting off to a rocky start. Now they’re in the spotlight again as pressure of tariff threats has eased for the moment. Materials (purple line) is another sector that could benefit from the trade talks, as it includes many companies that produce and process agricultural goods. Data Source: S&P Dow Jones Indices, Philadelphia Stock Exchange. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Slowing Growth A Market Issue? Should investors worry about recent analyst projections for slowing U.S. gross domestic product growth? Some analysts say not necessarily, pointing out that a portion of the economic slowing might have been reflected in last fall’s stock sell-off. Also, the Fed seems primed to do what it takes to prevent any major economic bumps in the road by lowering rates if necessary. That means even if growth slows, stocks might find themselves supported by the Fed. 

However, a Fed-supported market rally tends to favor some of the so-called “defensive’ sectors that typically perform better in a low-rate, slow-growth environment. We’re talking groceries and gas bills, or, in market language, Staples and Utilities. The economy isn’t expected to accelerate in Q3, either, with a Wall Street Journal survey showing an average GDP growth estimate of 1.6% for Q2 and 1.9% for the quarter that starts today. It appears that the 3.1% growth in Q1 might be the last in a while with a “3” in front of it.

Perspective Time: Stocks may be up almost 17% since the beginning of 2019, but for a better sense of how things are going, there’s the year-over-year SPX rise of around 8%. That’s not too shabby, but it wouldn’t be anywhere near the best year-over-year historic performance for the market. The Nasdaq is up about 7% over the same stretch. When you think back to a year ago, we were still in the middle of the market’s FAANG fling. At that time, some people worried that while the five FAANG stocks and some of their “cousins” like Microsoft Corporation (NASDAQ: MSFT) kept stretching their gains, a lot of other sectors didn’t participate. 

At this point, it seems like the wealth is shared a little bit more compared with back then, and that’s not necessarily a bad thing. Consider, for example, how a few of the “defensive” sectors like Staples and Utilities helped lead things for a while earlier this year. It’s hard to say any one sector is alone in the driver’s seat, and that could indicate more widespread economic health.

Halfway Point: Looking to the second half, it might be a challenge to keep things going without some kind of major geopolitical assistance. We could potentially continue to see a range-bound market unless the U.S. and China can settle their trade differences, and no one can really predict when or how that might happen. Stocks sit near their all-time highs and at price-to-earnings levels that are slightly above the historic averages, even as many analysts predict Q2 earnings to fall and the market appears to have baked in a 25 basis-point rate drop later this month. That doesn’t necessarily leave a lot of room to the upside without major trade progress or some other bullish development, maybe around earnings.

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