President Donald Trump on Wednesday put ink to paper, closing the much anticipated phase-one trade deal between the U.S. and China.
Stocks rallied -- and a solid portion of the rally is built simply on psychology, says one strategist.
The S&P 500 rose 0.3%, the Dow Jones Industrial Average rising 0.57% to pass 29,000, and the Nasdaq lifted 0.34%.
Investors had already priced in optimism about trade between the world’s two largest economies. In the past three months, the S&P 500 is up 10%, a rally built very much on optimism that the U.S. and China intend on having free trade.
Strength among consumers and record low unemployment are further firming sentiment in the market, which some say is getting a bit hot. Some market players say multiples are excessive: The average forward one-year price-to-earnings multiple on the S&P 500 is near 19.
But at the stroke of the commander in chief’s pen, stock prices still rose.
Now it’s a phase-one done deal, so the rally is “more psychological than anything else,” Tony Bedikian, head of global markets at Citizens Bank, told TheStreet. “Markets oftentimes move up in anticipation of a positive move, and then when it actually comes to fruition, it’s a 100% instead of a 95% chance that there’s going to be a trade deal.”
This isn’t to say that no fundamental are driving the market — investors are just optimistic that those drivers will remain in place.
Although GDP growth trending at roughly 2% is half the peaks of near 4% in 2018, the Federal Reserve has made clear it doesn’t intend to raise rates. Rate moves are pointed to the lower side for the next year or so. Consumer spend remains around 2%, but inflation hasn’t risen.
In addition, earnings growth is expected to rebound in 2020 from the contraction to end 2019. Investors have a lot of cash on the sidelines, many have noted.
Many on Wall Street are looking for a pullback in stocks, but in that direction, too, a catalyst is needed. “Unless those factors change or the consumer falls off a cliff,” Bedikian said, “this [economic backdrop] doesn’t necessarily portend to a near term pullback.”
Jason Pride, chief investment officer of private wealth at Glenmede, says, “In the broad scheme of things, multiple things have been going right at the same time, including this stabilization in trade relations, the resurgence in earnings growth expected for 2020 and more accommodative monetary policy here in the U.S.
“This has been, and should continue to be, supportive for risk assets, barring any major new developments.”
Plus, earnings-growth expectations for the year are about 5%, down from prior estimates of 8%. That provides potential upside, given that phase one halves the tariffs on some Chinese goods coming into the U.S. to 7.5%.
This reduces companies’ import costs, which in turn enables them to keep prices steady.
One cause for caution: Reports Tuesday say that a phase-two accord is unlikely until after the November presidential election.