Please, Don't Hold Your Breath On This Morning's Rally: Yesterday's and This Morning's Log Entry

06/21/18 (Thursday)

Clearly, global equities have little upside (and notable downside) potential as long as Washington holds the line on its current trade stance – despite a generally good macro setup (particularly in the U.S.).

Per Bloomberg this evening there’s quite the division on the issue among White House officials. Thankfully, some on the staff of the National Economic Council understand the fundamental flaws in the current path we're on:

“Some White House officials are trying to restart talks with China to avoid a trade war before U.S. tariffs on Chinese products take effect July 6, three people familiar with the plans said, setting up a battle with others in the administration who favor a harder line.

Staff of the National Economic Council have contacted former U.S. government officials and China experts in recent days to gauge chances for high-level talks in the next two weeks, the people said on condition of anonymity to discuss the inquiries. One idea NEC staff floated inviting Chinese Vice President Wang Qishan before the tariff deadline, they said.”

“The U.S. administration has said that after July 6, tariffs on an additional $16 billion worth of Chinese goods will be imposed after a public review period. The tariff threats have hurt U.S. stocks in the past week, with the Dow Jones Industrial Average headed for its eighth straight day of declines.”

As I’ve maintained since day 1, if tariffs are to be more than just threats the market is going to punish such action severely – and we haven’t gotten nearly to “severely” as of yet. The fact that Navarro seemed troubled and surprised amid the first notable trade-related selloff in stocks I find troubling to no end. The fact that he, Ross and Lighthizer seem to actually believe the case they’re making (I'm dumbfounded!) – and, alas, that they seem to hold the most sway with the President -- has got to have the NEC staff pulling their hair out.

The fact that the market (all participants in the aggregate) hasn’t resorted to “severe” measures as of yet speaks to the strength of general conditions and to its being in denial of the fact that the President’s trade advisers may indeed be as ignorant as they come across to anyone who’s received a little tutoring in basic economics.

In the end, and thank goodness, there’s little doubt in my mind that the market’s unquestionably negative (yet not severe) response(s) to any and all pushes to make trade matters worse will ultimately have the President seeking counsel with the legitimate counselors in his orbit. And when he follows their advice, as long as not too much macro damage has been done in the meantime, the market will likely see a swift and violent move to the upside. Then of course it’ll have mid-term election noise to contend with; assuming the powers that be come to their senses between now and then.

For now, macro conditions dictate that we stay growthy in our sector weightings. If things play out as I expect, we’ll likely see the hardest hit sectors of late (industrials, materials and financials) gaining the most during a rebound…

6/22/18 (Friday)

Ironically, per yesterday's entry, materials, industrials and financials are leaders this morning. We should view this as a preview of what to expect when the trade noise dissipates. However, we'd be foolish to think that under current trade-related circumstances that this morning is the beginning of something meaningful. Barring any positive headlines, I'll be surprised if traders will be willing to stay long heading into the weekend...