After months of heightened trade tensions, investors finally got what they wanted this weekend when President Trump agreed to a “ceasefire” with China’s Xi Jinping. Stocks jumped, Wall Street cheered, and sentiment shifted all in one fell swoop – independent of rate cut speculation.
It seems “Tariff Man” scored another direct hit for equities.
This time, though, he suspended future tariff hikes to boost a market that was looking ready for a correction.
Indexes were trading at or near their all-time highs, but over the last few weeks, bulls couldn’t generate enough momentum for a true breakthrough.
“That’s okay,” thought Trump.
“I know what can fix it.”
And it seems that a temporary truce did the trick. Whether it will last, or even produce a satisfying trade war conclusion is yet to be seen. But as of this morning?
Nobody cares.
Nor should they. Stocks have renewed life on this “bull’s Monday”. Why not get in on the fun?
Today’s surge is especially encouraging when you consider just how pessimistic many analysts were on Friday, one day before Trump and Xi’s meeting.
“The markets appear to be content with the cooperative tone coming out of the meetings. To me, it felt like the contrarian play was to the upside post meetings,” remarked Dan Deming, KKM Financial’s managing director.
“There was a great deal of bearishness in sentiment headed into the meeting. Many market observers were discounting any change in the narrative, which made many believe the risk was to the downside.”
A change in the “narrative”, in this case, is a huge deal as it could possibly remove the market’s biggest stressor. The softened economy, another source of frustration for investors, could be dealt with this month as well should Fed Chairman Jerome Powell finally slash rates.
And don’t forget; the first half of 2019 has been fantastic, as evidenced by a 17% rise by the S&P 500. It’s the largest January – June increase we’ve seen in 20 years.
But the last six months could look insignificant compared to what’s coming in Q3 and Q4.
Without a trade war and interest rates to worry about, Wall Street would have the ultimate “green light” to go long on nearly every stock under the sun. If the truce sticks, analysts will be handing out buy recommendations like candy as retail investors froth at the mouth, waiting for more.
And according to the President, chances are good that we’ll see a historic second half of the year.
“We are right back on track,” said Trump about the trade war negotiations.
And while it’s easy to get swept-up in the market-wide enthusiasm, I would also caution investors to observe one key concept:
This is by no means a trade war deal. Its only a temporary tariff-hike suspension.
Anything could happen from here, and the reason for the momentary truce could be a purely political one for both Trump and Xi. They’re facing immense pressure from their respective administrations to improve conditions back home, and with a re-election campaign lingering in 2020, Trump needs to string together a few wins.
In the trade war, stock market, and economy.
By agreeing to this ceasefire, he’s scoring points on all three fronts.
And if hostilities do resume, it’ll like come after the election. By all accounts, China still refuses to budge on intellectual property theft. Until they do, the trade war will continue.
But only if Trump serves a second term.
If he doesn’t, then China will have the leverage they need to surpass the United States over the next decade. And that, more than anything, should keep overly bullish investors on their toes.
