Market currents

Trump’s Trade War: Phase one is better than phase none

By October 14, 2019 No Comments

President Trump’s Trade War with China took a positive turn in the last few days. On Friday, the two sides announced that they had reached a phase one deal on some of their differences as it relates to trade. The biggest breakthrough was President Trump announcing he would not move ahead with a planned increase in tariffs. In exchange, China agreed to increase its purchase of US agricultural goods.

Any progress is better than zero progress

The media quickly dismissed this deal as more of a truce. And disregarded it as any type of substantive trade agreement between the two nations. While that is true, it also misses the big picture: that there is progress being made. Luckily for us, the media doesn’t determine what the market does. And judging by the S&P 500’s 2.5% rally to end last week, the market was happy to see signs of progress.

A phase one deal is better than a phase none. At this point, nearly two years into this Trade War, any progress is good progress. The market rallied significantly last week on an insignificant deal. This suggests that no signs of progress could have been a disaster for the market. We know the Trade War has increased volatility in the stock market, as the chart below outlines:

VIX chart since Trade War

What are CEOs saying about the Trade War?

Stocks and volatility have an inverse relationship. When volatility rises, stocks fall. And when volatility declines, stocks rise. So we were happy to see the volatility index declined more than 20% last week. This is another sign that the market applauds the recent progress made in Trade War negotiations. We would love to see a landmark deal on trade, but we’re not in charge of when (or if) that happens. All we can do is observe how the market is responding to recent developments and draw our own conclusions.

What’s clear to us is the market would be very happy to see continued progress on talks. We would call the recent progress as one step forward. The key now is avoiding the proverbial two steps backward. As long as talks stay constructive, we think the market can have a happy ending to 2019. Bellweather companies are set to report earnings in the weeks ahead and give their outlook on the global economy. We’ll be interested to hear if companies expect more progress on trade in the coming months. CEOs like Jamie Dimon and Tim Cook are closer to the market than anyone, so let’s see what they have to say.

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