Buy this stock-market decline on Monday.
That’s the recommendation of Fundstrat Global Advisors analyst Thomas Lee in a Monday research note, in the wake of a tumble by equity indexes across the globe partly inspired by an apparent escalation of Sino-American trade tensions.
President Donald Trump ramped up conflict between China and the U.S. after he tweeted on Sunday a threat to raise tariffs on $200 billion in Chinese imports to 25%, up from the current 10%, putting a tentative accord between the two countries in doubt ahead of negotiations set to begin this week in Washington.
The unexpected Trump announcement, coming as markets had held out apparent optimism over a near-term resolution, roiled global markets, driving China’s 399106, -0.65% Shenzhen Composite Index to a 7.4% loss, while the CSI 300 Index 000300, -1.43% tumbled 5.8% and the Shanghai Composite Index SHCOMP, -1.12% lost 5.6% on Monday.
Domestic markets also got whacked, with the Dow Jones Industrial Average DJIA, +0.08% , the S&P 500 index SPX, +0.04% and the Nasdaq Composite Index COMP, +0.01% on track for the steepest slides, at their intraday lows, since March 22, according to FactSet data.
However, Lee says there is reason to be a buyer in this downbeat environment.
He points to the fact that markets had been near records already, including the Nasdaq, which finished Friday at an all-time high, with the S&P 500 not far behind. The strategists said that even though some bears might argue that the heightened trade tensions represent an opportune period to take some chips off the table, or sell down holdings, it might be a lost opportunity for bulls because stock-supportive factors remain in force.
“Retail investors have been selling stocks and buying bonds so far in 2019. And hedge fund net long positions are among the lowest levels in 5 years. Hence, only the long only funds are fully exposed to equities. With so much on the sidelines, markets near highs, and with manager underperformance, we see this dry powder as a key dynamic,” Lee wrote.
The Fundstrat analyst also makes the case that the trade spat might prompt the Federal Reserve to remain “market friendly” by holding off on near-term interest-rate increases.
Lee said, “Unlike 2018, where the Fed seemed blinded by data dependency, we believe any mounting financial stress will be met by an eventual Fed response.”
At the start of the year, the Fed adopted a decidedly accommodative policy stance after a raising rates four times in 2018, citing tightening financial conditions and worries about trade wars. That Fed’s U-turn has been partly credited with helping the markets return to fresh records after a selloff late last year culminated in the worst plunge on the trading day before Christmas on record.
Growing optimism about a trade resolution and the softer posture by the Fed have often been viewed as key catalysts for the markets in recent months.
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