Investors are buying stocks, buying bonds, and buying gold...
Who is right?
JPMorgan analysts breakdown the bull-bear debate:
Reasons to be Bearish
1. Who cares that the world’s two most powerful leaders will hold bilateral talks at a forum designed to foster just that type of communication? The fact Trump and Xi are set to sit down in Japan really isn’t something to celebrate. Will the conversation simply result in another ceasefire that leads to interminable negotiations while keeping the existing tariffs (and Huawei restrictions) in place or are steps taken toward a more substantive agreement that lays the groundwork for an actual “deal”? It would seem the former is more likely than the latter. Simply avoiding incremental tariffs won’t be an enormous positive
2. Central banks may be easing but monetary toolkits globally are significantly depleted vs. pre-crisis levels. Most central banks are heading into this easing cycle w/rates already at the zero-bound level.
3. With Draghi departing the stage and Merkel’s political standing weakened in Germany, the bar to activate the ECB’s APP is probably higher than was the case before and as a result incremental policy will likely focus on further rate cuts instead of bond purchases for the foreseeable future
4. Incremental central bank easing measures are likely to create enormous headwinds for banks, esp. in Europe but also in the US (and it’s hard to be bullish about any stock market w/o at least some participation from its bank sector)
5. The historical relationship between yields and multiples clearly has attenuated (and may be completely irrelevant) – if equity multiples were a function of 10yr gov’t yields, German and Japanese stocks would trade at astronomical PEs (which clearly isn’t the case). Thus the SPX shouldn’t necessarily celebrate 10yr TSY yields down around 2%.
6. SPX valuations aren’t particularly compelling – the 2020 top-down consensus continues to bleed lower, moving from >$180 just a couple of weeks ago to ~$178 now. Assuming 2920 and $178 puts the PE at ~16.4x, a level that at best is “neutral”.
7. The upcoming CQ2 earnings season will probably be an underwhelming one based on some recent data points (this is especially the case for the semi supply chain, autos, etc.).
8. The US-China trade battle has been enormously damaging already and at the least this will appear in eco data and corporate earnings over the coming weeks. Simply avoiding incremental tariffs will still leave an enormous number of levies in place.
9. Trump’s Mexican tariff saga won’t be quickly forgotten as he: 1) proved himself an unreliable negotiating partner (threatening to place tariffs on Mexico immediately after spending months renegotiating NAFTA) and 2) set a dangerous precedent by threatening to solve geopolitical problems by economic means.
10. The persistent oil softness despite escalating geopolitical tensions and the likely extension of the OPEC+ production cuts is a giant red flag for global growth.
11. Europe faces a number of macro risk events this year – the political situation is precarious in Germany and very uncertain in Italy while Brexit is as far from unresolved as ever.
12. Middle Eastern geopolitical tensions could grow – the risk isn’t so much a deliberate war between Tehran and Washington but rather an inadvertent conflagration that winds up escalating into something larger.
Reasons to be Bullish
1. Central banks are easing policy – central banks around the world (including the ECB, RBA, FOMC, BOJ, and others) are either easing now or preparing to do so in the very near future
2. The US and China have an opportunity to repair their strained relationship at the G20 – Trump and Xi spoke 6/18 and confirmed plans to hold a bilateral meeting on the sidelines of the upcoming G20 summit (6/28-29). After weeks of acrimony, the G20 will give a forum for the two leaders to ease tensions
3. Non-China trade tensions have eased – while China is unresolved, the White House has backed away from other trade disputes, including w/Mexico-Canada and autos (the decision on whether to impose auto tariffs has been postponed until at least Dec)
4. The 2020 election should keep Trump on his best (economic) behavior – with the focus shifting to Nov 2020 and Trump polling poorly, the White House will (hopefully) look to bolster the economy while emphasizing non-financial parts of the platform (like immigration) rather than trade wars to excite the base.
5. Sentiment is negative – it’s hard to accuse the SPX as suffering from excessive euphoria and this relative gloom could serve to be a tailwind.
* * *
So who is right? Or does it only depend on what central bank liquidity does after all...