The stock market continues to zig and zag as investors continue to struggle with President Donald Trump’s bullish and bearish policy stances.
On the one hand, there’s Trump, the Deregulator and Tax-Cutter—his benevolent Dr. Jekyll persona. On the other is Trump, the Protectionist—his dark Mr. Hyde.
As Dr. Jekyll, Trump has stimulated the US economy and boosted stock prices. As Mr. Hyde, he has unsettled the global economy and depressed stock prices.
Consider the following:
(1) GDP and retail sales. Below, Debbie discusses May’s retail sales report, which was stronger than widely expected. As a result, last Thursday, the Atlanta Fed’s GDPNow model raised the Q2 estimate for real GDP growth to 4.8% from 4.6% on June 8 as the estimate for real personal consumption expenditures growth increased to 3.6% from 3.4%. The weekly Consumer Comfort Index has risen this year to the highest readings since 2001 (Fig. 1).
As we noted last week, the GDPNow model tends to be too optimistic and to pare the estimate as the release of the actual GDP data approaches. The first official estimate of Q2 real GDP will be reported on July 27. However, the trend of the revisions for Q2 clearly has been rising since early May.
(2) Jobless claims and Boom-Bust Barometer. Initial unemployment claims totaled just 218,000 during the June 9 week (Fig. 2). That’s among the lowest readings this year, which have been the lowest since the early 1970s. As a result, our Boom-Bust Barometer jumped to new record highs this year through early June (Fig. 3).
(3) Forward earnings. Our Boom-Bust Barometer is highly correlated with S&P 500 forward earnings, which has been dramatically boosted by the cut in the corporate tax rate at the end of last year (Fig. 4). Forward earnings is up 14.0% since the end of last year, flying into record-high territory and rapidly closing in on $170 per share, which has been our year-end target!
Multiply that number by a forward P/E of 18, and the S&P would be trading at 3060, close to our 3100 year-end target (Fig. 5). At Friday’s close of 2780, the forward P/E was 16.6 (Fig. 6).
(4) Tariffs. Admittedly, our bullish stance on the stock market outlook requires that Jekyll triumphs over Hyde. The forward P/E has been weighed down by Trump’s protectionism. If his tariffs trigger widespread retaliation and an outright global trade war, then earnings will take a dive. We continue to expect that it will all end peaceably. But it isn’t heading in that direction right now.
Trump started his protectionist saber-rattling on January 22, when he imposed tariffs on washing machines and solar panels. He next said, on March 1, that he would impose more tariffs as early as next week. It wasn’t until May 31, however, that he actually did so, imposing tariffs on aluminum and steel from the European Union, Canada and Mexico. Then last Friday, he slapped tariffs on $34 billion of goods imported from China. The Chinese pulled out their sabers and immediately retaliated by imposing tariffs on the same value of US goods exported to China.
There are many problems with tariffs. First and foremost is that they benefit far fewer people than they harm. They are intended to boost employment in the industries that benefit from such protectionism, but they immediately raise prices of the protected goods for all consumers.
The CPI for laundry equipment has been falling steadily since late 2012 (Fig. 7). It jumped 14% from December through May because of the tariff on washing machines and the jump in steel prices. The PPI for steel mill products in the US jumped nearly 10% from February through May after Trump’s March 1 threat to impose steel and aluminum tariffs during that month, which he did at the end of May (Fig. 8). So why aren’t stock prices crashing as protectionist saber-rattling is turning into trade skirmishes, which risk turning into an all-out trade war? Why aren’t bond yields soaring on the actual and potential inflationary consequences of tariffs? Good questions.
The S&P 500 is actually up 4.0% ytd (Fig. 9). The US MSCI stock price index has recently been outpacing the All Country World ex-US MSCI, particularly in dollars (Fig. 10). Nevertheless, the S&P 500 may continue to zig and zag through the summer as the Jekyll and Hyde sides of Trump struggle to dominate his persona. If the market breaks out to new highs, as we expect, that might not happen until after the mid-term congressional elections. Of course, by then, there also has to be some progress in reducing trade tensions.
Meanwhile, the stock market outlook will also be influenced by the path of Fed rate hikes and how that impacts the bond market. We were astonished that the 10-year US Treasury bond yield barely moved when the FOMC announced the 25bps rate hike on Wednesday to 1.75%-2.00%. Granted, it was widely expected, but the yield spread between the two-year and the 10-year Treasury note yields narrowed to just 38bps, the lowest since August 27, 2007 (Fig. 11).
Furthermore, inflationary pressures seem to be picking up here and there without rattling the bond market. In the US, the CPI headline inflation rate rose to 2.8% y/y during May, and the core CPI to 2.2% (Fig. 12). The ISM prices-paid indexes rose to 79.5 for manufacturing and 68.0 for non-manufacturing in May (Fig. 13). In the Eurozone, the headline CPI jumped to 1.9% y/y during May (Fig. 14).
However, most of the inflationary pressures may be related to rising oil prices, which fell sharply on Friday, confirming our opinion—as we discussed on Thursday—that the upside may be limited for a while by increasing oil supplies from Saudi Arabia, Russia, and the US. Also, last Thursday, the ECB indicated that while the QE program will be tapered later this year, the Eurozone’s central bank is in no rush to raise interest rates, which mostly remain around zero.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
© 2022 Newsmax Finance. All rights reserved.