Trade Truce: Market Appears To Get A Big Lift As Tariff Fears Retreat After G20

Over a steak dinner Saturday night, President Trump and Chinese President Xi agreed to take a coordinated step back from a looming trade war. That doesn’t mean the crisis is solved, but it might lead to some relief for a market that’s taken a lot of tariff-related punches lately.

Stocks surged in a huge overnight rally in pre-market trading. How long this good cheer lasts is the question, as investors might be impatient waiting for more details. The weekend agreement is arguably a positive first step, and we’ll have to see what the next steps are.

Basically, it looks like Trump and Xi agreed to kick the ball down the road. Instead of tariffs rising to 25 percent from 10 percent on an additional $200 billion of Chinese goods starting Jan. 1, as Trump had threatened, the clock is reset as the two countries agreed they’d “endeavor” to wrap up talks in 90 days or so. Meanwhile, China promised to buy more U.S. products, and both sides agreed to negotiations on other topics like intellectual property that have helped tarnish their relationship over the last couple of decades. So the overhang of a possible trade war hasn’t gone away, it’s simply retreated. The Wall Street Journal called it a “truce,” and that’s probably a good description.

That’s not to say the weekend news doesn’t have a chance to be constructive for stocks in the near term, because having roughly 90 days to straighten things out instead of less than 30 certainly pulls the curtain back a bit. Still, a lot of questions remain because many of the issues are pretty complex, so investors might want to consider tariffs as a potential market factor in early 2019. That could be especially true for sectors like materials, industrials, and info tech that have so much exposure to the Chinese market. 

Another thing to keep in mind is that U.S. financial markets will be closed Wednesday in honor of the late President George H.W. Bush, so there will be a mid-week pause.

Keeping Watch

As we’ve seen over the last year, two stocks in particular have often acted like searchlights for investors trying to get a read on the trade situation. Consider watching Boeing Co. BA and Caterpillar Inc. CAT today and in coming weeks for possible clues into how investors read the trade winds. Apple Inc. AAPL might be another company to watch, partly because it’s been beaten down so much over the last month (arguably due more to its own business issues than to trade), but also because its large manufacturing presence in China can make it look vulnerable to any crossfire between the two countries. 

Agricultural companies like Deere & Company DE and Archer Daniels Midland Company ADM might be other names to consider watching today and in the weeks ahead, because one thing China agreed to do is buy more U.S. agricultural products. The U.S. ag sector has had a rough year thanks in part to China looking elsewhere for grain and meat products. Automobile stocks like General Motors Company GM and Ford Motor Comapny F also appear to be getting a lift early Monday on signs China could be importing more U.S. cars.

Stocks surged in pre-market trading after the agreement got announced as investors signaled relief at having the tariff overhang pulled away for the moment. Volatility, which had been strong going into the weekend, fell sharply, with the VIX off 13 percent early Monday down below 17, from near 20 before the Xi/Trump meeting.

Additional Clues

Another way to monitor market reaction to the meeting could be the greenback. It strengthened late last week against a basket of other currencies and is close to its 2018 highs. If markets remain worried about trade, the dollar might reflect that by continuing to climb as some investors look for possible protection. A weaker dollar, on the other hand, might be a sign of more confidence in the path forward. 

In the commodity world, copper and crude prices often reflect the market’s economic outlook, and both have been under pressure this year (see chart below). Crude jumped early Monday.

If you’re a long-term investor eying all this volatility around trade, maybe you’ll decide you have your game plan and you’re going to stick with it and ignore the noise. If so, that’s great, as long as you realize there’s likely to be plenty of noise. If you have the discipline to not watch every tick of the market, you might find it’s better for your stress levels.

For shorter-term traders reacting to all this tariff tension, there’s likely no need to jump right in feet first. There are times when prudence can be a virtue, and getting into the mix right out of the gate isn’t necessarily advantageous. This morning may be one of those times where it could be best to consider being careful and letting things settle. Keep in mind that wide swings are possible.

It’s Not All About Trade This Week

Though trade might continue to dominate the discussion, let’s not forget other calendar items that could be catalysts in the days ahead. The market closure Wednesday is one factor to consider.

Also, in what media outlets described as a possible truce in the wake of Bush’s death, a partial government shutdown that had been potentially looming this Friday looks like it might get pushed back a week. We’ll have to wait and see. 

OPEC meets starting Thursday as questions circle around whether Saudi Arabia and non-OPEC member Russia might decide to ease production in the face of the 30 percent drop in crude prices since a month ago. Oil just suffered its worst month in a decade. Crude supplies remain pretty hefty, and so does U.S. production.

Anyone worried they wouldn’t get their Fed fix this week can breathe a sigh of relief. Fed Chair Jerome Powell will be back in public, testifying Wednesday morning at a meeting of the Senate Joint Economic Committee about—what else? The economic outlook. It’s likely to be televised, so consider watching the testimony and any Q&A to maybe get more insight into Powell’s thoughts after he helped send the market on a fast rally with last week’s remarks about rates being “just below” neutral. The only question is whether this might get postponed as the nation mourns President Bush that day, so stay tuned for possible developments.

As some analysts noted last week, Powell didn’t explicitly discuss some other economic issues in last week’s speech, namely inflation and economic growth. Anything he tells the Senate on those topics is likely to get some attention from investors. Recent data, including Personal Consumption Expenditure (PCE) prices, haven’t shown much evidence of inflation taking off, so perhaps Powell can offer his thoughts on that. A few other Fed speakers are on tap early this week before Powell’s testimony.

Did Powell Steal Thunder From Payroll Report?

The other big event comes Friday morning when November payrolls data hit the wire. There’s a chance this particular report might not swing as much influence as usual because Powell already gave a dovish speech last week. 

In previous months, the approach of a payrolls report often triggered concern that any overly strong numbers might get Fed leaders nervous about possible economic overheating, perhaps sending them scurrying toward the rate hike lever. This time, the report looms as investors appear pretty confident of one more 2018 rate hike later this month and a possible pause in the first-half of 2019. At least that’s what the futures market indicates.

The October report showed 250,000 jobs created with strength pretty much across the board and unemployment near 50-year lows. Also, wages rose 3.1 percent, the most in a decade. At the time, that wage number might have raised some eyebrows about possible inflation implications, but follow-up inflation data later in November didn’t show signs of higher wages translating into higher prices. Still, you can’t necessarily discount a possible impact, so that wages number is likely to get lots of attention again Friday. We’ll do a deeper dive into estimates as the week continues.

Figure 1: Fresh Start? Industrial commodities copper (candlestick) and crude have (purple line) have been beaten down since mid-year, as this year-to-date chart shows. Could the agreement between the U.S. and China give them a lift? Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Mad March Ahead?

The 90-day deadline for U.S./China trade talks to wrap up puts the needle roughly on March 1. If talks end then without much progress, the U.S. might decide to raise tariffs to 25 percent on $200 billion of Chinese goods which now have a 10 percent tariff. It’s likely China would take counter-measures against U.S. products. The March timeframe could be troublesome for more than one reason, which leads some analysts to wonder if the U.S. would actually go through with its threat. First, March 1 is around the time of China’s annual national legislative session, when Chinese leaders might be less willing to make concessions to foreigners, the Wall Street Journal reported. Second, the cutoff date for Brexit is March 29. By then, Britain and the rest of Europe would likely have to have a trade agreement in place, and that’s facing some obstacles. It might be a big blow to the world economy if U.S. tariffs rose the same month Britain made a “hard Brexit.” By March, we’ll also have a better sense of how U.S. Q4 earnings went. If there were a slowdown there, it might play into the tariff decision, too. Of course, all this is a long way off, but might bear some consideration as spring approaches.

Six Risks

If you’re a long-term investor planning 2019 strategy, it’s probably worth considering some of the risks facing the market in the new year. Research firm CFRA did exactly that last week, highlighting what it said are six “threats” to the long-term bull market that’s suffered two 10 percent corrections so far this year. The six that CFRA came up with were inflation, peaking earnings, rising interest rates, dollar strength, corporate debt, and trade/tariffs. None of this should sound too surprising to regular readers of this column. 

Looking at that list, inflation and the Fed might seem a little less worrisome considering Powell’s recent dovish words and benign price data. However, trade, the dollar, and earnings all could remain on the front burner, with corporate debt stewing in the background. If you’re a long-term investor looking ahead, you might want to consider how these factors could play into your plans, particularly from an asset and sector allocation standpoint. If you’re worried, for instance, about the strong dollar possibly hurting U.S. exports, have you checked to see how much exposure your portfolio has to export-oriented companies? Perhaps that could be a holiday homework assignment.

GDP Check

Last week saw the government’s second read on Q3 gross domestic product (GDP) growth come in unchanged at 3.5 percent. While that was down from 4.2 percent in Q2, there’s still a chance for overall 3 percent growth in 2018. Whether that happens depends to some extent on Q4 growth, and expectations aren’t as optimistic. The Atlanta Fed’s GDP Now indicator pegs Q4 GDP growth at 2.6 percent, the lowest since a 2.1 percent read in Q1 and barely above the 2.3 percent growth seen a year earlier. 

Analysts’ forecasts, meanwhile, are all over the map, from just over 2 percent to just above 3 percent. Some of the data due this week, including productivity, construction spending, and November auto sales might help provide more clarity about where the Q4 economy is headed, but it’s possible that trade and tariff jitters are clipping the pace of growth. Business spending is an area to consider watching, as it’s looked a bit weak lately. The other question is whether this fall’s painful market action might have caused consumers to draw back a little. 

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.