Investment Strategy
by Larry Adam
Chief Investment Officer, Private Client Group

Weekly Headings

October 11, 2019

Key Takeaways

• No Definitive ‘Checkmate’ Winner in the Current Trade Negotiations
• The Fed Awaits More Data as it Seeks to Avoid a ‘Blunder’
• Earnings Environment May Dictate Future Capex ‘Moves’

Tomorrow (Saturday) is National Chess Day, a holiday that has been in existence since the proclamation of President Gerald Ford in 1976. The game revolves around ‘power and conflict’ where intelligence, strategy, and patience are key, and calculated risk reward trade-offs need to be assessed on a continual basis. To win, you need to make the correct moves and make sure your pieces are in the right place at the right time. Today, these same dynamics confront global policymakers and investors as President Trump and President Xi go ‘head-to-head’ in negotiating a trade deal, Fed Chair Powell weighs the potential impact of further interest rate cuts, CEOs assess capital expenditures and hiring decisions in the midst of potential negative earnings growth and investors seek to structure their portfolios amid unrelenting periods of volatility.

• A Checkmate or Draw in the Trade Talks | President Trump and President Xi are in a prolonged, tumultuous game of ‘trade’ chess with many ‘pieces’ still in play. From agricultural purchases to intellectual property theft there are still major points of contention under negotiation. There is also the added ‘power’ dynamic as President Xi seeks to establish his legacy while President Trump desires to look strong to boost his re-election chances. We do not expect a clear-cut ‘checkmate’ winner in these negotiations. The most likely outcome is a ‘draw’ (no winner) with rematches periodically in the future. All attention will now turn to the November 14-15 APEC Summit in Chile, which both President Trump and President Xi are expected to attend and hopefully act to avert the more significant and economically damaging December 15 tariffs. In our opinion, the tariffs on the third $300 billion tranche of Chinese imports will be a ‘game-changer’ as those goods will directly impact the consumer and would likely have an adverse impact on the US and global economy.
• Avoiding a Big Blunder | In the game of chess, a serious mistake occurs when there is some sort of tactical error, whether it is due to time trouble, overconfidence, or pure carelessness. A tactical ‘blunder’ is exactly what the Federal Reserve is trying to avoid as it seeks to continue the current record economic expansion (124 months). The Fed does have its fair share of challenges to maneuver given amplified pressure from President Trump and growing expectations in the financial markets for further rate cuts. These challenges will test the Fed’s patience as it awaits further economic data from around the globe. At a conference this week, Chair Powell reiterated that there is no ‘pre-set course’ for policy, but that previous and future Fed action has and will continue to be dictated by how the ‘pieces’ (e.g. economic data) are arranged on the board. He also signaled that the central bank would proactively begin to buy short-term Treasury securities “soon” to alleviate potential liquidity concerns in the repo market. We anticipate that weak global growth and muted inflation will also lead the Fed to implement one more 25 basis point ‘insurance’ rate cut before year end.
• The Power of the Next Move | Next week begins 3Q earnings season, with many of the largest financial services companies kicking it off. S&P 500 earnings growth is expected to decline 4.0% year-over-year. As earnings have beaten estimates by ~3.8%, on average, over the past 20 quarters, history implies there is slightly more than a 50% probability of the S&P 500 posting negative earnings growth this quarter, the first time since 2Q16. For that reason, it is very challenging to see CEOs continuing to hire new employees and invest in capital expenditures in a flat-to-down earnings environment. That is why guidance will be critically analyzed to see if this weak earnings environment is a trend or if earnings are set to rebound in 2020. Consensus believes the latter, albeit a return to double-digit earnings growth appears unlikely.
• Be A Chess Player Not a Chess Piece | Incessant headlines have tested the conviction of asset allocation strategies and confronted the patience of individual investors. This week the varying degrees of optimism and pessimism over the trade war resulted in significant market swings in both directions. We caution investors against attempting to time the market around these types of headlines. In fact, most behavioral studies conclude that investors, on average, historically underperform the market when making hasty portfolio changes. Successful investors tend to have an asset allocation plan in place and a strategy for times of increased volatility. They not only focus on the next move but also know their next several moves. As a result, we encourage you to review your portfolio with your advisor so together you can ‘move your pawns’ to the right place at the right time as we move forward with more challenging markets.

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All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.