Highlights
• The longer the U.S./China trade dispute continues, the more economic damage it is likely to cause.
• The Fed is likely to cut rates again this month, which should provide a counterbalancing force.
• We are currently broadly neutral toward stocks and think investors should remain highly selective.
A sense of easing in the ongoing U.S./China trade dispute helped investor sentiment last week, as did an overall feeling that prices may have fallen too far too quickly. Equities rallied last week, breaking a four-week losing streak, with the S&P 500 Index climbing 2.8%.1 More cyclical areas such as industrials, communications services and financials led the way, while the more defensive utilities, REITs and consumer staples sectors lagged.1
Weekly Top Themes
1. Real third quarter U.S. gross domestic product growth could come in above 2%. The latest positive data was a 0.6% rise in consumer spending in July.2
2. Despite that rise, we are seeing evidence that trade uncertainty is hurting consumer sentiment. The University of Michigan’s Consumer Sentiment Index fell sharply from 98.4 in July to 89.8 in August, marking the largest monthly decline since 2012.3 So far, strength in the U.S. consumer sector has been a key reason we have been discounting the probability of a near-term U.S. recession, so this signal is worrisome should the trend hold.
3. We do not expect to see an advance in capital expenditure spending. There have been hopes that lower interest rates would spur capex spending, but our view is that it has been held back more by trade policy uncertainty than high interest rates.
4. Trade issues are unlikely to be resolved any time soon. The longer the dispute goes on, the more economic damage it appears to be causing. At the end of the day, any ultimate resolution of trade issues will depend on President Trump’s willingness to make a deal. And the bad news is that it appears the president would rather appear tough and combative to appeal to his political base than accept what he would consider a weak deal.