Press mute. Stocks dropped for a third straight session on fears that a trade deal may not happen anytime soon. New fronts in the trade war have been opened with Argentina, Brazil, and France, making investors uneasy.
- Messy messaging. Wow… or maybe not. Yesterday, a very chatty President Trump was dropping messages regarding just about everything while at the NATO summit in the UK. One, in particular, caught the attention of nervous investors. Trump stated that “in some way, I like the idea of waiting until after the election for a China deal.” That is not a difficult one to interpret and caused investors to hit their sell buttons. Just a few weeks back a Phase One deal was all but wrapped up and yesterday’s messaging suggested that we may not see a deal until late 2020. What does all of this mean, and why do I cover this so closely? A good portion of recent gains in equities has come from factoring in a signed Phase One deal. The Phase One deal, as we know it, can in no way be considered a real trade deal and was designed to get talks on track; more like an armistice than a peace treaty. Markets have been biased on the upside, which means that if things fall apart with the trade talks, markets can suffer, and yesterday’s market action was a reminder. Why all the rhetoric then? One interpretation is that the President is trying to push the Fed into lowering rates further at their next FOMC meeting next week. A mini stock market correction or a stall in trade talks might push the Fed to act, though Fed Funds futures only predict a 3.7% chance of that happening. The messaging may simply be designed to get China to soften its stance on tariff rollbacks. In either case, the stock markets do not appreciate the ambiguity. Not surprisingly, based on recent patterns, WHILE YOU SLEPT, it was reported that a trade deal was close and the two sides were working on just how much existing tariffs would be rolled back, according to “people familiar”. The reporting was seized on by traders pushing equity futures up overnight. Pressing mute might be the best strategy now.
- Who pays the bills, anyway. Throughout all of the politically charged haggling around the trade war with China, much of the coverage has shifted to the back and forth rhetoric between Trump and China. What seems to have been lost is the discussion around the real cost of the tariffs. The President has been vocal about how much money the US has collected in tariffs, but has failed to discuss the impacts on US companies. Let’s be clear: a tariff is paid by the person who is importing a good. If I want to import a tariffed television into the US, I would have to pay the tax! It is assumed that China would lower their prices to compensate for the tariff in order to maintain its market share. In practice that does not happen and, in fact, has not. While some importers shifted away from the Chinese producers, many are left with no alternatives. Though the trade gap has narrowed marginally, it has not nearly shifted enough to cover the tax being borne by US importers. The Government is collecting taxes… at a cost to US businesses. The threat of tariffs is therefore a more effective tool for negotiation than a tariff itself.
- History lesson. The last several days of market action might have evoked some memories of last December in which the markets corrected by around -15%. It is important to remember though, that things are different this December. Last year’s selloff was largely driven by fears that the Fed’s tightening of interest rates would push the US economy into a recession. The Fed reacted by changing its messaging and lowering interest rates by -75 basis points, which was a big driver of this year’s rise in equities. Earnings growth has waned a bit but still continues to grow. The same can be said about the economy, whose growth may have slowed, but still managed to grow above +2%. The trade war isn’t even close to being over but there are some green chutes emerging as the two sides are attempting to finalize on a Phase One deal. These are not ideal conditions for meteoric growth, but they are certainly better than they were last December. Today’s market warrants vigilance and focus to ensure that the conditions that helped push the markets up in 2019 don’t change.