The primary purpose of my oftentimes meandering morning market missive is to identify the primary drivers of the stock market environment. As I've stated a time or three, the idea is that if we can stay in tune with what Ms. Market is doing and why in the short-term, then we have a better chance of getting the big-picture right.
While it is Monday morning, and this is when I usually use my time to review our primary stock market models and indicators, I'm vacationing this week and am going to change things up a little. I will try to get to the indicator update tomorrow morning. But on this fine morning, I thought it might be best to put a label on what I believe is happening in the stock market right now.
Cutting to the chase, it appears that stocks are experiencing what William O'Neill calls a "bad news panic." In this case, the panic is over the impact of the trade war that is breaking out between the U.S. and China.
Although I personally don't have a lot of experience with trade wars, from what I have read so far, the fear in the market could very well be justified. Consider the following note from Barclays, who appear to have put a pencil to the potential impact of an all-out trade war: "We estimate that an across the board tariff of 10% on all U.S. imports and exports would decrease 2018 EPS for S&P 500 by approximately 11% and thus completely offset the positive fiscal stimulus from tax reform."
Yes, this analysis was done in a very conservative fashion and according to Barclays "assumes a worst case outcome of U.S. corporates absorbing all the impact of tariffs." But even if the analysis is only halfway accurate, it is clear that there could be an impact on corporate America.
So, there it is. The key to all the hand wringing over a trade war is really about earnings. And yes, inflation too - at least to some degree - which leads to concerns about the Fed's course of action and the potential for a misstep or overshoot from Mr. Powell's crew. If one continues to extrapolate here, it becomes clear what all the fuss is about.
My point this morning is that "bad news panics" tend to be fairly short-lived and driven by, well, the news. And while stocks seem to go down every single day lately, it is important to recognize that good news can happen as well in these environments.
In fact, stocks are looking to bounce up a bit at the open on word that China and the U.S. have quietly started negotiating. And since the objective of this so-called trade war is to make a deal, the market is likely to follow the progress of the deal closely here.
How long the bounce lasts this morning is anybody's guess. And I have no idea whether or not we've seen the emotional lows of this move. However, from my seat, the key is that a "bad news panic" is tied to the news - and good news can - and does - happen. So, we will need to monitor the headlines for word that China and the U.S. have agreed to some sort of deal that can both sides look good.
Publishing Note: I am vacationing the rest of the week and will publish reports only as needed.
Thought For The Day:
To be conscious that you are ignorant of the facts is a great step to knowledge. -Benjamin Disraeli
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research
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At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.
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