Talk of “pent-up demand” has been a staple of bullish commentary for as long as I’ve been alive, at least. But in the stock market, it seems people really have been waiting to buy, and every sign that the big dangers of the China trade war and a no-deal Brexit are receding has prompted another rally in risky assets.
The question now that a trade deal is virtually done and the British election has delivered a rollicking victory for the governing Conservative Party is whether this is the start of a renewed market boom, or merely the late stage of a monster relief rally. My guess is the latter, but without much confidence.
The case for buying is obvious. Bringing down tariffs between China and the U.S. is good for both economies, and great for China-exposed stocks—shares in chip makers Micron Technology and Nvidia Corp jumped more than 3% on Thursday, while operators of casinos in China’s Macau region soared.
A thumping Conservative majority in the U.K. takes away two worries for investors. First, that the losing Labour Party’s pledge of hefty tax rises on the rich could prompt capital flight from the country while expanding the size of the state.
Second, that a small Conservative majority could give the extreme anti-European wing of the party control of the trade talks that will follow the expected formal exit from the European Union at the end of January. The pound duly rose, while the FTSE 100 was also up on Friday morning in spite of the currency headwind; utility stocks soared with Labour’s threat to nationalize them neutered.
Even the time of year is right for a big jump in stocks, to confirm the widespread belief in a “Santa rally” around Christmas.
The twin threats to presents in the stocking are that markets have anticipated much of the good news already, and the new year will probably bring with it a fresh wave of uncertainty.
There was already a strong consensus among Wall Street strategists and fund managers that trade fights would calm down, that a no-deal Brexit was off the table and the outlook for 2020 was all good.
After a great year for the S&P 500, a big rally in riskier assets such as smaller stocks and cheap value stocks, and an astounding 10% rebound in sterling from early October to the $1.35 briefly reached early on Friday, much of this is surely priced in. There’s still scope to close the discount British stocks trade at, but that isn’t the same as starting a new bull market.
Worse, the risks are merely reduced, not eliminated. The hard points of U.S.-China trade were put off for later rounds of talks, and will be more difficult to resolve, if they can be resolved at all. China hawks now dominate both parties in Congress, and are likely to keep pushing President Donald Trump to restrict the country’s access to technology, potentially hampering trade.
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And the threat of tariffs on the European car industry has been deferred to next year. If Mr. Trump decides to follow through on his threats, an economy-draining trans-Atlantic trade war could follow.
Brexit won’t disappear from the agenda, either. The formal exit in January will be followed by painful discussions about the U.K.’s long-term trade relationship with the EU. Markets—and some former Conservative cabinet members—assume that British Prime Minister Boris Johnson will go back on his election promise not to extend the end-2020 deadline for a trade deal with the bloc. As many investors point out, he has broken many previous promises, including his “do or die” deadline for a formal exit this year.
The deadline for an extension to trade talks is next July; if Mr. Johnson sticks to his pledge not to extend, the markets would rightly worry that the prospect of a no-deal Brexit could resurface by the end of the year.
Still, there’s scope for a return to the exuberance that took markets to excess at the end of 2017 and again just before the winter selloff in 2018. Sentiment gauges show investors are bullish, but not wildly so. Good news might again feed on itself and make people forget the risks that lie ahead. If that happens, then the market could rise a lot before hard realities again capture investors’ attention.
Write to James Mackintosh at James.Mackintosh@wsj.com
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