Deal or No Deal?

As far as the stock market is concerned, it is a deal, and that created a massive short squeeze that drove the stock market higher, smashing through technical resistance with the S&P 500 now trading above both the 50-day and 200-day moving averages. The uncertainty that paralyzed markets in April appears to have completely subsided. For now, it’s onward and upward.

The thing that flipped the stock market’s switch was the ‘deal’ between the United States and China. Both sides described substantial progress toward resolving their trade dispute. However, the reality is that we have a 90-day cooling-off period with sharply reduced tariff levels (see chart below). Make no mistake, this is progress, as neither side could last very long under the massive tariffs that had been levied in the last several weeks. Each economy remains dependent on the other in one way or another. But even under those conditions, the tariff reduction was greater than almost anyone had expected, and the stock market reacted.

Both sides profess that there is no desire for a full economic decoupling, but that appears to be where we are headed. Trade between adversaries needs to be very limited by necessity. That cannot be achieved in the short run, so for now each side must learn to play nice in the sandbox, but expect each side to be very tough in any negotiation. For both sides, saving face is a critical element of policy, and that will make it difficult to reach a negotiated solution.

A 90-day truce is not a deal. It is more similar to a cooling-off period in a labor dispute. The tit-for-tat tariff escalation from April caused significant consternation, and while that is now over, the tariffs that remain are still substantial. Nonetheless, we expect a flood of products from China as a result, because companies understand all too well that reaching a negotiated solution will be difficult and can take sudden, drastic turns. There is a strong incentive to make hay while the sun shines.

That reaction has economic implications. While the economy was clearly slowing in the first quarter, some uptick should now be expected over the next several months. And this is conducive to a stronger stock market. The caveat is that the current conditions can turn on a dime-a lesson well learned over the last few months. While this truce has de-escalated tensions and boosted market confidence, it is a preliminary step. The path to a comprehensive, long-term trade agreement with China remains a very sizable challenge.

Staying Focused on Your Long-Term Goals

The market experience over the past 3 months simply reinforces that hastily adjusting to one’s investment portfolio allocation based on the emotion of the moment has the potential to substantially affect the long-term return! It’s easy to see how harmful an emotional decision to sell just a few short weeks ago could have led to a substantial loss of long-term capital appreciation. As we repeatedly remind our clients, one of our key roles as financial advisor is to keep you on track with your financial plan, helping you to avoid making potentially harmful emotional decisions during periods of short-term volatility.

Have a great week!

 

What We’re Reading

 

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The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

 

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By: Adam