Monday, March 4, 2019

Are We Staring Into a Sell-the-News Scenario?

A growing theme among market pundits is that the ending of the U.S./China trade spat is already baked into the stock market; i.e., it's a "sell the news" event. Hence today's selloff.

While some of the underlying data are beginning to skew in that direction (growing optimism among individual investors and investment advisors [a contrarian signal], for example), I'm thinking it's a bit premature to join that camp. While the market may indeed sell off on the inking of a deal (that eliminates newly added tariffs), in my view, if it does, rather than being a sell-the-China-news event, it'll be a sell-the-Europe-rumor event. Meaning, if we agree to end the latest tariff schemes with China, yet proceed to wage a new war with Europe, I see a testing of the 12/24 lows as a highly probable event.

Another sell-the-news scenario would be one where a China trade agreement simply assures that no additional tariffs will be levied, but all or some of the duties implemented by both sides over the past year+ remain intact. That, I completely agree, would be an absolute sell-the-news scenario. 

In my view, a buy-the-news trade deal requires a complete rollback of all recently added tariffs, along with a reasonably positive tone toward Europe going forward.

Again, in the eyes of a growing number of "experts", even the latter will be met with heavy selling. My struggle with that narrative has to do with the hard evidence that trade uncertainty has done a real number on business sentiment, and, therefore, on earnings projections as well. Remove that uncertainty and I believe you'll see confidence return, expansion plans readopted, and corporate earnings outlooks brighten quite dramatically; which would be unequivocally bullish for stocks.

We'll keep you posted....

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