Key Takeaways
• Policy uncertainty remains high, particularly around trade.
• While it is good news that an agreement was reached with Mexico over the weekend to avoid those tariffs, a trade deal with China is unlikely until more economic pain is incurred by both China and the United States.
• We have reduced our 2019 earnings estimates to acknowledge the increased risk of a prolonged trade conflict, though we remain above consensus estimates.
Last week stocks enjoyed their best week since November 2018 despite rampant policy uncertainty. Policy uncertainty remains high, particularly around trade, but you wouldn’t know it from last week’s stock market rally, which jumped 4.4 percent on increasing hopes for Federal Reserve (Fed) rate cuts. That jump brought the S&P 500 Index to within 2.5 percent of its April 30 record high. However, that doesn’t mean stocks are in the clear as the trade conflict with China continues.
Policy Uncertainty Is High
We know policy uncertainty is high, but researchers have actually quantified it by creating a policy uncertainty index [Figure 1]. The U.S. version of this index, which counts words in news stories associated with economic and Washington, D.C., policy and tracks them over time, is high—no surprise. The trade-policy-specific version of this index is similarly high and trending upward—no surprise there either. Our friends at Strategas Research Partners tell us that searches for “tariffs” on Bloomberg hit their highest level of President Trump’s presidency last week.
So where are we now with regard to trade uncertainty? First, we received some good news over the weekend as President Trump announced a deal with Mexico to avoid tariffs on Mexican goods. The agreement, which will be finalized over the next 90 days, calls for Mexico to commit resources to immigration enforcement.
Turning to China, the outlook is more muddled. We suspect that more economic pain will be inflicted on both countries, which ultimately will push the process forward. That pain, we believe, will eventually result in a trade agreement—hopefully by the end of the summer—but that is hardly assured. The good news is the two sides are talking again. U.S. Treasury Secretary Steven Mnuchin spoke to Chinese central banker Yi Gang at the G20 Finance Ministers meeting in Japan this weekend, and President Trump plans to talk to Chinese President Xi at the (broad) G20 in Japan later this month.