Tuesday, October 15, 2019
...at least relative to bonds
The "phase one" trade deal announced Friday looks like the illusion many suspected it was. But it doesn't mean all is lost for a stock market that many believe needs a trade deal in order to continue climbing higher.
In a note to clients on Monday, Savita Subramanian and the equity strategy team at Bank of America Merrill Lynch said that stocks remain a "no brainer" relative to bonds.
In August, the dividend yield on the S&P 500 topped the yield on the 10-year Treasury for the first time in three years. Today, the spread is still in favor of stocks, with the S&P 500's dividend yield sitting at 1.93% while the 10-year stands at 1.73%.
Generally, this has been bullish for stocks. BAML notes that in 94% of past instances in which the market's dividend yield topped the 10-year, stocks outperformed bonds over the 12 months by an average of 23 percentage points.
Now, news flow over the last several days has been frustrating, confounding, and maddening (among other things) for investors seeking resolution to the trade fight. Market history, however, still suggests better days are ahead for the bulls.
On Monday, Bloomberg reported that China wants to hold more trade talks in order to finalize the deal announced by President Donald Trump on Friday. Some observers were unsurprised by this development.
Analysts at Bespoke Investment Group wrote Monday that, "It’s not an exaggeration to call the entire Friday-Monday news flow around trade nothing but a Kaiser Soze theater production." And so in the same way the widely-feared Kaiser Soze character in the 1995 The Usual Suspects never really existed, so too was a U.S.-China trade pact — even a “phase one” deal — never extant.
And indeed, Friday's announcement made clear that a phase one deal would lead to discussions on phases two and three of a comprehensive trade agreement. Which almost begs the question — why stop at just three phases?
Mike Wilson at Morgan Stanley, however, said he was "underwhelmed" by Friday's announcement and sees trade not as a factor holding back the market but in fact boosting stocks. Wilson says a potential trade deal is a "threat" that has prevented "fundamental investors from selling bad news for fear of missing out on a trade deal rally."
Wilson, we'd note, has been steadfastly bearish for some time now. And he said Monday that his view of the tax cuts creating a "classic boom/bust cycle" that must now be completed is unchanged. Friday's close, in Wilson's view, should mark a near-term high for the market.
So, where Wilson sees trade inflating current values in the stock market right now, others see trade holding back valuations that are unnecessarily depressed because of an overhang from trade uncertainty.
In today's market, it seems everyone agrees on the diagnosis and disagrees on the cure.
What to watch today
5:55 a.m. ET: UnitedHealth Group (UNH) is expected to report adjusted earnings of $3.75 per share on $59.74 billion in revenue
6:15 a.m. ET: BlackRock (BLK) is expected to report adjusted earnings of $6.97 per share on $3.60 billion in revenue
6:40 a.m. ET: Johnson & Johnson (JNJ) is expected to report adjusted earnings of $2.01 per share on $20.08 billion in revenue
7 a.m. ET: JPMorgan Chase (JPM) is expected to report adjusted earnings of $2.46 per share on $28.47 billion in revenue
7:30 a.m. ET: Goldman Sachs (GS) is expected to report adjusted earnings of $4.86 per share on $8.31 billion in revenue
8 a.m. ET: Citi (C) is expected to report adjusted earnings of $1.95 per share on $18.54 billion in revenue
8 a.m. ET: Wells Fargo (WFC) is expected to report adjusted earnings of $1.14 per share on $21.17 billion in revenue
4 p.m. ET: J.B. Hunt Transport Services (JBHT) is expected to report adjusted earnings of $1.45 per share on $2.34 billion in revenue
4:15 p.m. ET: United Airlines (UAL) is expected to report adjusted earnings of $3.97 per share on $11.42 billion in revenue
From Yahoo Finance
Reporter Brian Cheung will be covering the Annual Meetings of the Boards of Governors of the World Bank Group (WBG) and the International Monetary Fund (IMF) in Washington DC today and tomorrow. Watch live coverage throughout the day on Yahoo Finance from 9 a.m. ET to 5 p.m. ET.