On Wednesday, in a piece for Dealbreaker called “What’s The Biggest Near-Term Risk To Global Equities? You Can Choose Between Trump And Trump,” we showed you the following chart from Barclays:
As noted in the piece linked above, that’s from their latest quarterly global macro survey that represents the views of 400 clients. Asked last month to identify “the biggest risk to global equities in the next three months”, clients overwhelmingly chose “U.S. fiscal and trade policies” versus last quarter when “geopolitical shock” was identified as the biggest risk.
The real punchline comes when you think about that in the context of Wednesday morning’s Trump tweets. That survey was conducted from March 12-19, which explains why investors were so concerned about fiscal policy and trade policy (that’s when the trade banter was really starting to escalate and also when Congress was trying to pass the spending bill that Trump ultimately threatened to veto only to change his mind, hold a press conference to sign it four hours later, and use said press conference to talk about nuclear submarines and fighter planes with Predator cloaking abilities – “total steeallllth“.
And while I imagine those same 400 Barclays clients are still concerned about trade and deficits (because God knows those issues have only gotten worse since March 19 when the survey was completed), I’d be willing to bet that all the people who switched their answer to the “biggest risk” question from “geopolitical shocks” last quarter to “U.S. fiscal and trade policies” this quarter are now having a hard time deciding between the two because after all, on Wednesday Trump told Russia that he’s going to ass fuck the Kremlin’s “gas killing animal” ally in Damascus with “nice, new” missiles. On Thursday morning, he admitted that there is no set date for when he’s going to grab Bashar al-Assad by his “gas killing animal” pussy, but despite the date not being set in stone, it seems like he’s destined to incinerate some shit in Syria over the next week or two, raising the geopolitical stakes materially in the process.
So that brings us to a new piece out from Wells Fargo’s Chris Harvey who thinks these political shocks – as crazy as they are – are gradually losing their ability to alarm people. To wit:
In our view, the same or similar exogenous shock often has a decreasing impact over time as the market prices in the perceived risks. We think this is especially true of the still evolving trade spat. In late Jan’18, we had tariffs on washing machines & solar panels. Shortly thereafter, the market took a tumble. After the initial China tariff, the market fell about half as much and more recently, the market is trading in a back and forth fashion as tariff talk yo-yo’s.
This is reminiscent of Aleksandar Kocic’s “noisy status quo“.
Harvey goes on to suggest that Q1 earnings season should have the effect of muting vol.:
We believe expected volatility (VIX) will decay over the coming days and weeks. Volatility, in general, is equal to uncertainty. During earnings season, the market receives more information and gains a greater degree of certainty. In such an environment, we would anticipate a decline in market risk and outperformance by riskier stocks. Over the last 5 years, the average volatility throughout 1Q earnings season has been lower than the preceding month (Exhibit 11). Please note we don’t need 1Q18 earnings to be good or excellent. As long as earnings results are within expectations, the information should depress volatility.
Note that last bolded bit. That’s debatable. Remember what Goldman said a week ago. Essentially, they argue that with the bar set as high as it is (see chart below) “the reward for EPS and sales beats will be limited this quarter, but the downside risk for misses will be substantial.”
Whatever the case, Wells Fargo goes on to reinforce one critical point that I’ve made over and over again: whatever was baked into prices from the tax cuts is being priced out due to the trade war, suggesting that Trump has shot himself in the foot:
The ongoing trade war appears to have eclipsed the positives associated with tax reform. We think it is overdone and has created opportunity for long and short term investors.
So you can draw your own conclusions. As you can probably divine from the excerpted passages, the above-mentioned Chris Harvey is generally upbeat, for whatever that’s worth.
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