Morgan Stanley Tells Stock Bulls Not to Kid Themselves on Trade
Bloomberg – Using the U.S.-China trade truce as a reason to dive into equities failed miserably 10 months ago and is unlikely to work now, according to Morgan Stanley strategists led by Mike Wilson.
It’s already looking shaky, considering the S&P 500 erased half its 1.9% rally on Friday in the day’s last 30 minutes. In that session, shares surged after President Donald Trump said the two sides agreed to the outlines of a deal that could be signed as early as next month. Gains shrunk as traders realized many of the thorniest issues remain unresolved.
The pattern is “strikingly similar” to the one seen in late last year, when a trade truce at the G-20 meeting in Argentina sparked a rally on Dec. 3 that lost steam at the close, Wilson said. That episode didn’t end well, with the S&P 500 sinking 16% over the next few weeks before bottoming.
While a more accommodative Federal Reserve could limit losses this time, the strategist suggested it’d be a mistake to pile on gains as last week’s trade talks did little to improve economic and business fundamentals.
“We characterize the Phase 1 agreement as more of a ‘truce’ than a deal of notable significance,” he wrote in a note. “We fully expect Friday to mark the near-term highs and the next few weeks/month to resemble what we saw last December, albeit less dramatic given the lower interest rates and easier monetary policy that now prevails.”
The assessment is at odds with the view of JPMorgan Chase strategists led by John Normand, who urged clients to embrace equity gains. In a note Friday, Normand said investors should be prepared for a gain of 10% or more under a “blue sky” scenario where agreements on trade and Brexit are reached.
Fear of missing out on a trade deal rally has kept investors from selling on bad news, leaving the market vulnerable should economic and earnings start to matter, according to Wilson. Contrary to the widely held belief that the economic slowdown has been primarily driven by the trade war and therefore should start to ease once a deal is stuck, Wilson argues that the growth deceleration was the result of the unwinding of excesses created by tax cuts. Even when trade has hurt the economy, he says, Friday’s deal is not enough to revive growth.
“Growing trade tensions between the U.S. and China have been used as an excuse by companies and investors for disappointing growth experienced this year,” Wilson wrote. “The bottom line for us is that without a significant roll-back of existing tariffs, we don’t see how a ‘mini-deal’ will change the currently negative trajectory of growth in both the economy and earnings.”