China, China, China

As we close out the first quarter of 2019 with a nice rebound from the lousy fourth quarter of last year we move into the springtime with many skeptics calling for the U.S. economy to soften leading to a global slowdown scenario that will drag down most major stock markets around the world. One event or a collection of events that could change this scenario is that China makes a deal with the U.S. on long debated trade issues and the economy in China finally starts to improve from its recent decline. If China decides to work with the U.S. in constructive changes to intellectual property and foreign investment rules that allow improved trade conditions then the odds swing favorable that the U.S. stock market can continue to surprise with upside possibly to new highs.

Yesterday, a much watched economic signal from China showed an unexpected improvement in its Caixin/Markit Manufacturing Purchasing Managers’ Index or (PMI) which came in at 50.8 for March for the first expansion since last October. A reading below 50 signals a contractionary economy. New orders climbed to the highest level in four months showing that both domestic and external demand rebounded moderately from previous signals. Stock markets are up today in Europe and early pre-market trading in the U.S. due to the strong Chinese PMI signal that indicates that traders and investors are watching and reacting to China economic data and where it could lead.

Obviously, if trade talks get stretched out and possibly damaged by lack of progress on key trade issues then the weight of support will quickly shift to quarterly earnings guidance for the remainder of 2019. Earnings forecasting will likely be lukewarm at best if trade conditions remain challenged for all major multi-national U.S. companies that depend on China and Europe for growth.

The other major factor that will influence the stock market in the U.S. over the next six months or longer is the surge in IPOs (initial public offerings) that are poised to hit the market. Last week, ride sharing company Lyft, Inc. came public with a great deal of attention. Traditionally, the companies that come public first during IPO season perform the best as fresh ideas see robust investor interest. The tricky part becomes a month or two down the road when more questionable companies come public and the buying interest starts to wane from lack of new capital to deploy and a more skeptical eye is required.

Finally, I know I have said this several times in recent commentaries but the dramatic change of view by the Federal Reserve to its ‘wait and watch’ attitude toward interest rates will help economically sensitive stocks in the stock market. This supportive role by the Fed will likely limit any correction due to the near term weekly news headlines. I am looking forward to quarterly reports right around the corner. Bring them on.

Have a great week,

Roger N. Steed

April 1, 2019

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