The latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.

Within the past week, the US and China were able to agree on a phase one trade deal that delayed the December 15th tariffs indefinitely and also rolled back some additional tariffs to 7.5% from 15%. In return, China is expected to address intellectual property rights and forced technology transfers, as well as purchase $200B more US goods ($40B ag products) than it did in 2017 over the coming years. This was marginally more than investors were expecting in our view and has resulted in sustained equity market momentum on trade progress optimism.

Next, the US and China are expected to sign the deal in DC in early January according to USTR Lighthizer, and the deal goes into effect 30 days after the signing. Additionally, President Trump has stated that negotiations on a second phase will begin “immediately.” The latest news on trade progress supports our view that tensions should simmer in 2020, as President Trump looks to support the economy and equity markets into his re-election campaign. We would expect any setbacks on trade to be short-lived for this reason, as he “kicks the can down the road” on the more difficult, structural issues between the two countries.

The easing of trade tensions, along with monetary and fiscal stimulus undertaken over the past couple of years flowing through the global economy, should support improved manufacturing trends next year in our view. There continue to be signs that the manufacturing outlook could be turning, and this is a major theme that affects our view of investment positioning in the new year.

We have a cyclical bias to our sector recommendations given our belief of improved global manufacturing. Relative performance of the industrials sector has tended to trend with manufacturing new orders this economic cycle, so an improvement should support performance next year with valuation attractive. Also, with the Fed likely on hold and global growth ticking higher, the yield curve has steepened. This should support Financials performance, which has been tightly correlated with the yield curve, with valuations also reasonably attractive in our view. These are our two recent upgrades to overweight recommendations; and we also remain overweight Technology, Health Care, and Communication Services.

Our view on the equity market outlook also lends itself to be opportunistic with the small caps and emerging markets, as well as Europe. We see the opportunity in these areas and believe they could outperform over the course of the year, but would accumulate them as their trends prove sustainable (building positions over time). For now, technical trends continue to favor Large Cap US equities.


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