Evening Note

You’ll recall that a major headwind for equity markets over the past couple years has been the US/China trade dispute(s).

As I suspect you suspect, the latest developments therein are anything but market-friendly. But of course today’s a different story. Fundamental (let alone geopolitical) risks are utterly forgotten, or entirely misunderstood as they relate to the potential for strong corporate earnings growth in the foreseeable future remotely justifying present pricing. Today’s market is trading purely on headlines and hyperbole. .

Yes, of course, a vaccine is what we’re after, for all the right/obvious reasons. One reason, however, that doesn’t hold water is that it will ultimately address the market’s fundamental woes. Recall that our analysis of general conditions had them deteriorating months before we even dreamed of global pandemic.

Exacerbating the ultimate risk waning economic trends presented was/is an underlying corporate credit bubble for the ages.

Here’s from the Fed’s latest Financial Stability Reportemphasis mine…

“An indicator of the leverage of businesses—the ratio of debt to assets for all publicly traded nonfinancial firms—was at its highest level in 20 years at the beginning of 2020.”

“Debt owed by businesses had been historically high relative to gross domestic product (GDP) through the beginning of 2020, with the most rapid increases concentrated among the riskiest firms amid weak credit standards.”

“… there is potential for stresses to interact with preexisting vulnerabilities stemming from financial system or fiscal weaknesses in Europe, China, and emerging market economies (EMEs). These risks have the potential to interact with the vulnerabilities identified in this report and pose additional risks to the U.S. financial system.”

Yes, I know, the Fed’s on it; they’ll print and lend till the cows come home, or, that is, till the economy comes back.

Yep, you’re right, but as I’ve been warning herein, be very careful what you ask for. Even the Fed’s own economists can’t help but warn of the risks should they “succeed”:

“Policy interventions may help businesses withstand a period of weak earnings by issuing new debt and extending existing credit, but many of these businesses will emerge with even higher amounts of leverage, suggesting that vulnerabilities stemming from the business sector, including nonpublic companies and small businesses, are likely to remain elevated for some time.”

And that’s putting it mildly…

Back to our troubles with China. Make no mistake, what was a huge headwind over the past couple of years will remain a huge one going forward should the rhetoric become in any way real.

As for the risks of rhetoric becoming reality: Well, to this point the stock market has held strong sway over what Washington was willing to do with China. Going forward, I’m not so sure.

You see, it’s an election year, and:

And, frankly, given China’s latest, rightfully so. 


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