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Opinion
Robert Burgess

Trump’s Tariff Tweets Do the Markets a Big Favor

A healthy pause leads market commentary. Plus, treasured Treasury bills, Turkey troubles, sinking soybeans and more. 

Tough talk. 

Tough talk. 

Photographer: MANDEL NGAN/AFP/Getty Images

President Donald Trump’s threat on Sunday to levy additional tariffs on Chinese goods because of the slow pace of trade talks sent the S&P 500 Index down by as much as 1.61 percent before it recovered to end lower by a less jarring 0.45 percent on a report that a delegation of Chinese officials still plan to travel to Washington this week to talk trade. The initial decline was painful, for sure, but cathartic as well, in that it should act as a sort of reset and make the market healthier following a nearly unimpeded trek upward this year. As the strategists at Cantor Fitzgerald put in a research note, sentiment had swung from December’s “we’re all gonna die” to “I gotta buy.”

That’s not to say the 17.5 percent gain in the S&P 500 this year was unwarranted. The risks to the economy have clearly receded following the Federal Reserve’s dovish pivot and some strong jobs reports. Bank of America Corp. says a model it uses to track the odds of a recession over the next 12 months – which takes into account items such as the yield curve, credit spreads, equity values and various risk metrics – has collapsed to just 4 percent from 55 percent in December. Nevertheless, stocks aren’t cheap: The S&P 500 is trading at about 17.6 times projected earnings and is valued about as highly as it was just before the fourth quarter’s steep sell-off. If, in fact, trade tensions escalate and the U.S imposes more tariffs on Chinese goods, it might make it harder for U.S. companies to meet already low earnings growth projections. “It has been and remains our view that expectations are too high for forward returns and can be derailed by the smallest of wobbles to the bull narrative,” the Cantor strategists added. That’s not an isolated idea. Despite the run-up in stocks this year, strategists have generally been hesitant to boost their forecasts. The median estimate of 25 strategists surveyed by Bloomberg News is for the S&P 500 to end the year at 2,950, not much higher than the 2,913 forecast back in July and representing about a 0.5 percent increase from Monday’s close of 2,932.47.