Drying paint

Drying paint.  Stocks were barely changed yesterday as US - Chinese trade talks stall.  The Fed offered no new hints of stimulus and appears to be happy with the status quo.

MY TWO CENTS

1.  Infinite loop.  If you didn’t know any better, you would have to check the date of this post, but yes, this is Friday’s daily market note… and no, we still do not have a trade deal.  It has become clear in the past week that both sides appear to be at a difficult impasse.  The Chinese expect existing tariffs to be rolled back and the US has made it clear that was not going to happen... without further concessions.  Let’s go back to the real reason for the trade war.  The US hoped to pressure China into reforming intellectual property practices,  forced tech transfers, and illegal state subsidies.  There is at least another page of more minor concessions, but those are the big ones.  I won’t go over all of the gory details of what happened since the war started but suffice it to say that it is certainly affecting both sides at this point.  In an attempt to move the ball forward the sides finally came up with the phased solution.  Seems like an easy win for both sides right?  Wrong.  It appears that China’s biggest bargaining chip is farm purchases and the US’ biggest bargaining chip is the tariffs on Chinese goods.  The Phase One trade deal allegedly includes China purchasing $50 billion in farm products.  A resumption of purchases would weaken China’s hand significantly, which is why Beijing would like the US to cut tariffs.  If the US does agree to cut tariffs in order get an interim deal done it gives up its single strongest lever to achieve the original goals of the trade conflict.  In practice, Chinese resumption of agricultural product purchases is easy to achieve and would actually be helpful to the country.  Changing intellectual property practices and subsidies is not something that they can easily accomplish, even if they wanted to.  In other words a comprehensive trade deal seems a long way off.  Markets are hopeful that a phase one deal can be reached and have factored in its success.  Larry Kudlow helped a bit WHILE YOU SLEPT, saying that a trade deal was close but “not done yet”.  Sound familiar?  The statement was good enough for traders, who pushed equity futures up overnight.

2.  Tech wreck’oning.  If you look at Chart 2 (trailing 12 month sector returns) in my attached daily chartbook, you would note, not surprisingly that technology has been the best performer over the past year.  In fact if you look back five years, technology grew by an impressive +111% while the S&P500, also a big winner, only rose by +52%.  This shouldn’t really surprise anyone who has been paying attention.  Technology offers investors not only earnings but also potential for future growth, and if we learned anything in the past thirty years, tech can deliver.  With tech having delivered so much, one wonders how much more it can deliver going forward.  Take the now-classic FAANG stocks.  Facebook, Apple, Amazon, Netflix, and Google.  Facebook has become a behemoth gobbling up its competitors and expanding aggressively into commerce and other sectors, never mind their influence on social behavior.  Apple continues to reinvent itself, delivering a steady flow of solid hardware and software and has found a new source of revenue in services.  Amazon has eclipsed the retail sector and moved on to discover a whole new line of business in cloud computing.  Netflix dominates the online streaming space and continues to deliver award winning original content and has expanded its audience to other countries.  Google continues to dominate online search and has moved into almost all aspects of a user's digital life.  Sounds good right?  With all of these companies getting so large and a growing wave of large company skepticism, we can expect regulatory scrutiny to increase in the years ahead.  For those that are paying attention, this is already apparent in numerous attempts by Eurozone countries to tax and regulate the giants (Facebook and Google).  The US is not far behind with an increasing number of congressional lawmakers calling for breakups.  Amazon’s once windfall in cloud computing has drawn competition from Microsoft, IBM, and Google making the space more competitive and costly.  The success at Netflix has drawn competition as well luring in Apple, Amazon, Google, and the latest entrant Disney, whose Disney+ offering announced that it already had 10 million subscribers.  The list goes on and on but the takeaway here is that the contours of tech, as we know it, are going to change drastically in the years ahead.

THE MARKETS

Stocks were virtually unchanged yesterday as traders contemplated the lack of a completed trade deal and nothing new from the Fed.  The S&P500 inched up by +0.08%, the Dow Jones Industrial Average slipped by -0.01%, the Russell 2000 dropped by -0.02%, and the NASDAQ Composite Index fell by -0.04%.  Bonds climbed and 10-year treasury yields dropped by -7 basis points to 1.81%.

WHAT’s NXT

- Retail Sales excluding Autos and Gas are expected to have climbed by +0.3% month over month after being flat in the prior month.

- Industrial Production is expected to have dropped by -0.4% for a second month in a row.

- Empire Manufacturing Index is expected to have increased to 6.0 from 4.0.

- The Fed will release is Financial Stability Report today.

Have a great weekend!

daily chartbook 2019-11-15