The Trade War with China has yet to be resolved in any meaningful fashion. However, markets around the world appear optimistic that a deal is coming, even if it’s just a Phase One agreement. Either that or markets simply don’t care if the Trade War doesn’t have a positive resolution, short-term or otherwise. We find the latter hard to believe. So it’s interesting that markets are at highs even as President Trump seemed to harden his stance this past week. By rallying higher without a firm deal, it’s possible that the markets are calling President Trump’s bluff.
President Trump is again talking tough, threatening to move forward with tariffs on December 15. This comes after he had previously hinted these tariffs would not go into effect. And China will reportedly not agree to any type of deal if existing tariffs are not rolled back. In August and early October, similar Trade War-related headlines caused fast sell-offs in the market. However, the market did not react nearly as poorly to the latest news as it did back then. This suggests the market is taking the latest threats less seriously or is less concerned with the possible fall out.
What do bluffs look like?
For context, let’s evaluate some of the headlines and the subsequent drops in the S&P 500 from August to now. Our first chart looks at the most recent drop in the S&P 500, a 2.4% decline from November 29-December 3 after President Trump said he might not make a deal with China after all:
This compares to a 3.4% decline for the S&P 500 from September 30-October 3. That decline was blamed on weak manufacturing data, which economists said was a direct result of the Trade War:
Both of these declines were much smaller than the S&P 500’s 5.6% drop that occurred from August 1-August 5 after President Trump announced new tariffs on Chinese goods:
Over the last 3 months, the drops in the S&P 500 have gotten smaller and smaller. The specific catalyst for each drop has varied. But they have all had one underlying theme in common: the Trade War. The fact that the market has rallied to new highs without any official agreement to end the Trade War, or at least moderate it, is a bit perplexing. The market sold off swiftly during early August when the Trade War was seen as escalating. So our takeaway is that the market doesn’t see the latest rhetoric as a sign that tensions are rising.
Rather, the market appears to believe that both sides are posturing for negotiating purposes. The other possibility is that the market has already priced in a continued no-deal Trade War, and it doesn’t think the inevitable fall out will be that bad. However, we’d point to the price gains markets experienced in November as evidence against the second point of view. Therefore, we think the market is calling President Trump’s bluff and does not actually expect new tariffs to go into effect on December 15. If those new tariffs do happen, we expect a negative market reaction in the immediate term. The date is only a few days away. So we’ll soon find out if the market has it wrong and if our latest intepretation of price action is off base.
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