Runaway Trains, Planes, and Automobiles

Shah Gilani|June 1, 2020

Like a runaway train the market kept barreling ahead last week, make that last month, make that the last two months, actually make that since the March 23, 2020 lows.

The S&P 500 ended last week up 3%. It ‘s up a whopping 17.79% in the last two months. And is up a mind-bending 36.06% from its March lows.

So far so good. But, there ‘s a problem. No one knows where the train tracks lead.

Markets could have gotten off track on Friday. The Dow was down about 300 points as nervous investors pared positions ahead of President Trump’s “conference.” But, instead of slamming China and ratcheting up rhetoric, or tossing trade war and tariff threats, the President just pointed a finger and repeated his displeasure with the Mainland ‘s heavy handedness over Hong Kong’s future.

And back up went stocks.

What pre-conference selling revealed is how jittery investors are, but there ‘s a lot out there that matters…

China Matters

Over the weekend the Chinese lobbed a spitball back at the President. Maybe they are going to be the ones that undermine January’s Phase I trade agreement. They intimated they may not buy more American goods and services per agreement. They haven’t been abiding by the terms of Phase I anyway.

China’s supposed to buy $186.6 billion more U.S. goods and services to meet its Phase I obligations in 2020. Exports to China this year were down 10% in Q1. For the year, the Center for Strategic and International Studies estimates, U.S. exports to China could only amount to $60 billion.

Under the agreement China’s supposed to import $290 billion of goods and services in 2020 and $330 billion worth in 2021.

It doesn’t matter that Phase I targets were unrealistic from the get-go, what matters is the deal is unraveling before our eyes.

It’s going to be hard for President Trump to face the farmers he championed when going after Phase I. So far in 2020 soybean exports to China are down 39.4%.

The President’s going to hear it from auto manufacturers. Auto sales to China are down 46.9%.

Energy exports are down 33%.

And commercial aircraft sales to China this year total zero.

Getting into a full-on trade war with the market at elevated heights could be a slippery slope.

Race Riots Matter

The market has to digest what’s going on in the streets of America’s big cities, and small towns too.

Planes and Automobiles Matter

The airlines have been thrown a $25 billion lifeline, but it’s not enough. All U.S. carriers, carriers around the world for that matter, are bleeding cash and have no revenues to speak of. The country’s not going to open up fast enough, and even if it does, there’s no guarantee people will want to fly with abandon.

The market has to digest what’s going to happen to America’s airlines.

Auto sales started April looking good. Then they faded by the middle of the month. The last week of April sales were down 38% year-over-year. May’s auto sales look to be down 25% to 30% year-over-year.

The market has to digest what’s happening in Detroit, how auto manufacturers are going to survive and how many workers they’re going to have to furlough or layoff.

Unemployment Matters.

With more than 40 million people out of work and struggling for the few jobs coming online as the economy reopens, investors are going to have to calculate what’s going to happen to demand when stimulus checks and extra unemployment benefits run out.

Friday, we get the Bureau of Labor Statistics May jobs report. It’s not going to be pretty any way it’s sliced or analyzed.

And there’s a lot more that matters.

The question is, will nervous investors derail the train as everything that matters shows up in every headline all summer?

As solid, make that as astounding as the rally’s been, I’m not sure keeping what matters in sight isn’t going to slow the ride down, or maybe derail the train.

Watch out for a June Swoon!

Until then,

Shah