Noise Or Signal?

From the second half of last week through the first half of this week, the S&P 500 rallied. It surpassed our target of 2700 and made it to almost 2740, retracing more nearly 2/3 of the decline from the record high set last September. It stalled ahead of the 200-day moving average, which had previously offered support declines. The S&P 500 pulled back in the second half of the week. The fact the three-day decline is the longest so far here in 2019 is also a revelation about the recovery from the December swoon. 

Trade and growth concerns are widely cited culprit. I had an opportunity to join Jonathan Farro on the Bloomberg set explain why I thought these narratives were making mountains out of molehills (click here for three-minute video). Our information set did not really change in the middle of the week. US-China trade talks continue. Trump and Xi's meeting was never confirmed and it looks like there may not be one before the early March deadline. Even though conventional wisdom holds that a deal requires the two Presidents face-to-face, the lack of a meeting does not necessarily mean that the tariff freeze will not be extended.  

Of course, the trade talks are difficult. On the one hand, the US wants China to embrace "free markets," but on the other hand, the US wants outcomes that it does not want to leave to the markets, like the large trade imbalance. It wants a stronger yuan, but it is critical of intervention. Moreover, the S&P sectors that were the hardest hit, like energy and financials have little to do with the trade talks.  

In this discussion with Farro, Brian Nick the Chief Investment Strategist at Nuveen and Keith Parker, head of US equity strategy at UBS, I try to make the case that weak growth is a late 2018 story. The 2019 story is the adjustment of policy. The Fed has long anticipated reducing the pace of hikes this year after four last year. A pause had been foretold. And press conferences after every FOMC meeting, as other major central banks do, give the Fed more flexibility. After all, since the crisis, it has only changed rates at meetings followed by a press conference.  

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Read more by Marc on his site Marc to Market.

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Gary Anderson 7 months ago Contributor's comment

The problem is, the USA wants China to embrace free markets in China, but not in the USA.