The Markets: Will a China Trade Deal Dominate?

Over the last 18 months or so, the market direction has been determined by the trade war and various news stories, and tweets from President Trump. The overall market has been more volatile and the market hasn’t gained much ground even though there have been some pretty wild swings.

From January 22, 2018 through the close on September 9, 2019, the S&P 500 has gained 5.13%. Yet the index has hit new record highs on three different occasions, and that doesn’t include the record that was hit just before the trade war started. I chose to use January 22, 2018 as the starting date because that was really the first action taken in the trade war when President Trump announced so-called safeguard tariffs. That is marked by the first red arrow on the chart.

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I have covered the trade war with several articles over the last year and a half and went through the various announcements in detail with an article back in May. The rhetoric and the announcements have been well timed with market peaks and troughs—more heated announcements have come at peaks and announcements of progress have come at troughs.

In August, the S&P had fallen for four straight weeks and then it bounced back when China announced that it would not make retaliatory tariffs, at least not right away, after President Trump announced new tariffs. The S&P rallied after the announcement and then it rallied again last week when the two sides agreed to the date for the next round of meetings. The sheer fact that the two sides agreed on a date to meet was viewed as progress.

With the trade war dominating a great deal of the headlines and being the biggest determinant in market direction, I started thinking about what happens once we get a deal. The end of the trade war has been so widely anticipated and each sign of progress has been greeted with buying from investors. I can’t help but think that once a deal is reached that we will see one big round of buying that sends the S&P to another all-time high, but that big round of buying will be the crescendo to this bull market.

If an agreement is reached between the U.S. and China, it will certainly help the global economy, but I’m not sure it can end the economic slowdown that seems to be picking up steam at this point. Just last week we saw the ISM Manufacturing Index show that manufacturing in the U.S. is contracting at this point—or at least it did in August.

Europe’s economy has been dragging along with very low GDP growth for approximately a year and a half now and that development has nothing to do with the trade war between the U.S. and China. We also know that the European Central Bank has cut rates to the point that the equivalent rate to our Fed Funds rate is negative. A trade deal between the U.S. and China isn’t going to fix that.

There is also the ongoing saga that is known as Brexit. One prime minister has already stepped down/been pushed out due to this debacle and now Boris Johnson doesn’t look to be doing much better as the new prime minister. When Britain does finally separate itself from Europe, who knows what the impact will be on both sides of that divorce.

My concern is that many investors will view a trade deal as the end of the global economic worries and will put everything back into the stock market. But despite the trade deal, the economic indicators continue to show slowing. Then there won’t be this carrot of a trade deal dangling out there to move people back into the market. Then what?

We will have to see how this plays out, but personally I will be playing it cautiously. Depending upon when and if a trade deal happens, I may use that as an opportunity to take some profits off the table.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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