Markets Pushing Through Geopolitical Headwinds
Overnight markets rose as the appetite for risk-on assets returned after a seemingly serious military standoff between the U.S. and Russian naval ships off the coast of Syria was tempered by aggressive diplomatic intervention. A suspected chemical weapons attack by Syrian forces on the rebel-held town of Douma has led to threats of U.S. intervention from President Trump.
The Syrian government and its Russian partners deny that chemical weapons were used or that Syrian forces carried out the attack, which occurred Saturday night and is reported to have killed at least 43 people.
Defense Secretary Jim Mattis told the House Armed Services Committee on Thursday that his greatest fear from a potential strike on Syria is that the conflict would “escalate out of control, if you get my drift.” Russian, Turkish and Iranian forces are operating in Syria along with U.S. forces combating Islamic State militants, risking a conflagration if a U.S. strike goes awry.
U.S. stocks rose and Treasuries retreated as investors speculated that tensions in the Middle East won’t escalate into a destabilizing conflict. In Moscow, President Vladimir Putin, Assad’s ally, appealed for common sense in a world growing “more chaotic.” It is a time when cooler heads need to prevail, and yet chemical weapons used by Assad’s regime on civilians is not something the U.S. will just watch from the sideline.
Earlier in the week, the market got some good news regarding the potential trade war that was brewing between the U.S. and China. China’s President Xi Jinping struck a conciliatory tone in his speech at the Boao Forum for Asia, the equivalent of the Davos, Switzerland summit for western financial powers. Xi said Cold War and zero-sum mentalities were “out of place,” and backed free trade and dialogue to resolve disputes in his keynote speech Tuesday night.
Xi’s speech sent a positive signal to global markets that he backs the opening of China’s market, pledging “a new phase of opening up” that affirmed expansion of increased imports, lower foreign-ownership limits on manufacturing and more protection for intellectual property – all of which are focus issues of the President Trump’s tariff campaign to hit hundreds of Chinese products with duties.
China has become a first world economic power, second only to the U.S. and they face a credibility gap after years of promises to free up the economy. Instead, more centralized control, barriers to market access and theft of intellectual property have characterized China’s global trade profile. These ongoing practices of the past 30+ years are at the center of President Trump’s hard-hitting rhetoric that is now resonating.
To put it simply, China blinked. They have very long term global trading goals that would take a white paper on my behalf to explain, but for now, I’m satisfied with the face-saving response from President Xi to keep global equity market pushing higher. China’s debt to GDP Ratio reached 257% in 2017, higher than the U.S. 152% and more than most emerging economies. The IMF forecasts that by 2020 China’s domestic credit to GDP will rise to 300%!
Source: Zero Hedge
China can in no way afford a 20% stock market correction, which is very possible in a full-blown trade war situation. And I think this became the lever in the entire dialogue being conducted in the back channels of diplomacy. Trump came out swinging, as is his style, China retaliated after getting slapped in the face for decades of abuse, and now a deal is in the works following a previous pattern of negligence to protect America’s commercial interests abroad.
While these two scenarios have proved to be short-term headwinds, investors are buying equities as the market sits on the doorstep of earnings season. According to recent data from Thompson Reuters, first quarter earnings are set to rise by 18.4% over the same period a year ago. And it doesn’t stop there. Second, third and fourth quarter earnings for 2018 are expected to meet or exceed 17% year-over-year growth.
Granted, tax reform has a hugely positive impact on these upward revisions, what I’m truly encouraged by is the robust revenue forecast. Q1 revenue for the S&P is expected to rise by 7.4% (YOY), Q2 by 7.5% (YOY), Q3 by 6.6% (YOY) and Q4 by 5.4% (YOY). Assuming these numbers are achievable, geopolitical headwinds will take a back seat to market fundamentals.
Technical support for the S&P 500 sits right around 2,600 where the rising 200-day moving average comes into play. After four attempts by the bears to crack that very important psychological line, the S&P held and has turned higher this week, now challenging 2,670. Typically, the stock market rallies smartly in front of earnings season when expectations are running high. The fact there has been a lot of geopolitical overhang opens up the possibility of a sling-shot move higher for the market in the next month as investors who reduced market exposure look to get back in. The Seasonal Chart for the SPDR S&P 500 ETF (SPY) shows a strong up-and-to-the-right pattern in the making. Time to get long.
Headline risk is still very much a threat to any rally but seeing the market has managed a slightly more hawkish Fed, both the China and Syrian situations, the change of cabinet members in the White House administration along with the FBI raiding of President Trump’s lawyer Michael Cohen’s office and hotel, it’s hard to imagine the bulls being denied their chance to push stocks higher.
As earnings season unfolds next week and Spring is in the air, stock prices should bloom, especially those core holdings within the RoboInvestor model portfolio that I’m currently crafting to release shortly. I highly encourage all readers of RoboStreet to become RoboInvestors and come along with me as we take matters of making outsized market returns into our own hands.
Stay tuned for how to register next week. It’s an exciting time for the launch of RoboInvestor! Upon coming aboard, our money will go right to work in 8-10 recommendations. I say “our” money because I put my personal investing capital into each recommendation. And when my ‘always learning’ AI system says buy, buy, buy in specific high-powered blue-chip stocks, it just makes my job that much more fun.
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