U.S. stock indexes have rallied impressively in 2019, partly on a more dovish Fed and greater optimism that the U.S. and China will reach a deal that lowers tariffs between the world’s largest economies.
However, the S&P 500 index’s SPX, +0.23% year-to-date rally of 10.9% has led some analysts to predict that the market is setting itself up for disappointment once a final deal is announced, assuming one is reached at all.
Neil Dutta, head of economics at Renaissance Macro Research, however, made the case in a Wednesday research note that the market has more room to run before it makes up the gains lost due to rising Sino-American trade tensions.
“Since January 2018, we estimate that trade tensions have shaved a cumulative total of 300 points off the S&P 500,” wrote Dutta. “In other words, if not for all the negative trade news over the last 14 months, the S&P 500 would be about 11% higher.”
“That said, trade has been more of a tailwind to equity prices since the start of 2019,” he continued. “Year-to-date, the S&P 500 has jumped 107 points on days of favorable trade news,” he continued, adding that while optimism is growing, the market is “still not back to neutral on this issue.”
In an interview with MarketWatch, Dutta explained that he arrived at these figures through a process of headline analysis, which codes daily movements in the major U.S. benchmarks as due to one of several factors, including, U.S. economic data, Federal Reserve actions or statements, developments in trade negotiations, or other Washington-related news.
“I wouldn’t necessarily use [these data] to make big sweeping calls, but the analysis captures general equity market movements based on macro factors,” Dutta said, arguing the numbers square with the history of Trump administration trade negotiations, including the agreement reached over the summer to reform the free-trade agreement between the U.S., Mexico and Canada Agreement, or USMCA, which replaced the North American Free Trade Agreement and still needs to be ratified by Congress.
“That’s why we saw a modest improvement late last summer,” when markets rose on days that trade news dominated, Dutta said.
The interaction between two or more of the factors analyzed by Dutta, however, could result in the market reaction to a successful resolution of the U.S.-China trade standoff being more muted than these numbers suggest.
Alec Young, managing director of global markets research at FTSE Russell, for instance, argued in an email that Federal Reserve actions and the outcome of trade negotiations shouldn’t be analyzed in isolation. “A superior trade deal might make the Fed more hawkish, which could stall stocks,” he wrote.
And investors, of course, need to be aware that ‘given the high expectations after 2019’s big year-to-date rally, there is still plenty of room for any China trade deal to disappoint,” or to not materialize, Young wrote. “The bottom line is there are far more ways a China trade deal can disappoint rather than impress investors.”
Even so, Dutta’s data go a long way in explaining cumulative pressure trade tensions have had on the markets over the past 18 months, and how much loftier stock prices could be, absent the continuing tariff standoff.
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