A new cold war - Tatical trading opportunities in the US stock market

The US stock market has managed to close the first half 2019 with a double-digit return of 18% and made a new milestone by printing another fresh all-time high of 2,995 on 3 Jul 2019. The price return of the S&P 500 in the on-going secular bull cycle from Mar 2009 is at 348% (measured from low to high) and that makes it the second-best return since 1974 where the best record run was a performance of 615% during the Oct 1987 to Mar 2000 secular bull cycle.

This remarkable performance has been achieved on a backdrop of a “worrisome and bleak global economic outlook”.

Global manufacturing activities have been lacklustre since the start of 2019. The global manufacturing PMI compiled by Markit has worsened for a second consecutive month in Jun where it declined to a fastest rate since Oct 2012 to print a level of 49.4, an 80-month low. A level below 50 represents contraction.

The on-going trade tension between US and China have not shown any concrete signs of resolution. On a bigger scale, it has morphed into a new “cold war” where US administration’s new China policy seems to be containment (technologically, economically & geographically).

Yield curve inversion. The short end of the US Treasury yield curve; 3-month/10-year spread has been inverted since May 2019 and it stands at -0.19 bps as at 09 Jul 2019. This observation means that the shorter-term 3-month interest rate on US government securities is less that the longer-term 10-year interest rate. The more widely monitored longer end 2-year/10-year spread has yet to turn negative where it has been flat since Dec 2018 and stands at 0.15 bps as at 09 Jul 2019. An inverted yield curve represents a slowing economy and it tends to precede a recession.

The only bright spark for the US stock market is a 360-degree change in the US central bank, Fed’s monetary policy stance; from hawkish to dovish. After nine rounds of interest rate hikes that begun in Dec 2015 that brought the Fed funds rate to 2.25%-2.50% in Dec 2018, the Fed had signalled that it was readied to enact “insurance rate cuts” in the recent Jun FOMC meeting. Based on Fed funds futures pricing data from CME FedWatch Tool, the markets have started to price in a possibility of three interest rate cuts before 2019 ends.

As seen in the chart, one US defensive sector; the Real Estate/REITS has started to outperform with a gain of 19.6% YTD that made it the 3rd best outperforming sector against the S&P 500.

The business model of the Real Estate/REITS sector offers a constant stream of dividend disbursement via rental collections. Thus, with the prospect of lower interest rates in the coming months, the higher dividend yield spread of the Real Estate/REITS sector over interest rate on government securities can act as buffer against the headwinds seen in the current global macro backdrop.

City Index offers access to a wide range of popular US stocks, that can be traded as CFDs, allowing you to go long or short with low cost of trade from 1.5 cents per share (min USD 15) and tight spreads.

Disclaimer: This publication is for general circulation only and has not given any consideration to the specific investment objectives, financial situation or particular needs of any person.

 

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