When In Doubt Just Blame It On Trade Tensions – Why Not!

Well, we knew things were going to heat up today, the chart of the S&P 500 told us that it would happen. The only thing we weren’t sure of was the direction. So blame it on the trade war if you want, the action today was baked-in into the charts, and I am not surprised. The only place I went wrong was the direction. Hey, you can’t get everything right all the time, 1 out of 2 isn’t bad. I should have realized yesterday when the S&P 500 failed at 2,863.

Hey, trade tensions are even helping people in the US buy homes with mortgage rates going down. When in doubt blame it on trade worries. Why not, it sounds good.

Forget about those weak PMI’s across the US and Europe, they don’t matter at all!

I’m still scratching my head in terms of what the potential impact of a trade war would be on S&P 500 earnings estimates? I spent about 3 hours this afternoon trying to come with a hard number. I get the sense that nobody has a clue, and I’m not saying I do either. I have no way to actually to assess the impact on earnings. The actual impact on the economy based on the import numbers and GDP, I believe will likely be minimal, there are actual numbers I can use to think that through.

The best I could come with regarding earnings is roughly a 4.5% hit to earnings estimates, assuming all the tariffs go into place. Let’s have some fun and see what we come up with.

Operating earnings estimates for 2019 would fall to $158.20 from $165.52, and 2020 would fall to $175.56 from $185.03. That would leave the S&P 500 trading at 17.8 times 2019 estimates, and 16.1 times 2020 earnings estimates. Still, that is below the S&P 500 historical one-year forward earnings of 17.4 going back to 1988. Even at 17 times 2020 earnings, the S&P 500 gets to 2984, at the historical average of 17.4 it goes to 3054. So do I feel the trade stuff is overblown, yes!

Does that mean the market can’t fall further? Of course, it can, at 15 times 2020 estimates with 4.5% discount, we get to 2,633. But with rates on the 10-year 2.32%, I find it unlikely. I mean the S&P 500 SPDR (SPY) yields 1.85%, keep that in mind. As prices fall, yields rise.

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Disclosure: Michael Kramer and the clients of Mott Capital own TSLA and ACAD

Disclaimer: This article is my opinion and expresses my views. Those views can change at a moment's notice when the ...

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