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Takeaway: It remains somewhat surprising that more investors are not moving to the sidelines amidst the cloudy outlook.

This guest commentary was written last night by Mike O'Rourke of JonesTrading

Complacency (And Misguided Optimism) - z11

The S&P 500’s 2.8% rally last week on trade optimism was clearly misplaced.

On Sunday, the United States implemented 15% tariffs on $110 Billion of Chinese goods.  China reciprocated with its own retaliatory action.  The S&P 500 futures re-opened for trading for the week nearly 1% lower last night, then spent the night rallying back to flat.  It appears the S&P 500 futures mechanically followed European equities higher as they rallied amidst volumes that were off by 40-50%.  The S&P 500 futures then tumbled to new lows just before noon, as Bloomberg reported the US and China are struggling to agree on a schedule for the planned meeting in Washington this month. 

Bloomberg  noted China had requested the US delay yesterday’s tariffs.  Obviously, the US denied the request and trust between the two sides is eroding.  October 1 is the next tariff deadline when the 25% tariffs on the first $250 Billion of goods escalates to 30%.  That will be followed by the December 15 tariffs of 15% on $160 Billion of goods that include cell phones and laptops. 

The equity market’s resilience has been impressive. 

Two thirds of the way through the year, the S&P 500 is still up 17% and settled on Friday within half of a percent of its 2018 peak. The index has easily scaled the wall of worry that includes the trade war, an inverted yield curve, economic deceleration and slowing earnings. 

Asset prices have been supported by a shift in monetary policy from tightening to easing, and what appears to be a never ending number of hopeful trade headlines.  Although such headlines rarely come to fruition, the market never resets when they are replaced by the reality of events. 

Last week, the equity market did appear to get a boost from month end portfolio rebalancing due to the strong performance of treasuries and the equity market weakness in August.  Looking ahead to Q4, there are the two additional tariff deadlines and Brexit to look forward to. 

It remains somewhat surprising that more investors are not moving to the sidelines amidst the cloudy outlook.  That said, every sale over the past decade has been a bad one, and investors are conditioned to patiently wait for central banks to save the day.  That does not work at the start of an economic downturn, but complacency permeates throughout this environment.

EDITOR'S NOTE

This is a Hedgeye Guest Contributor research note written by Mike O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.