More Details On The Trade Deal
Phase 1 of the trade deal has been agreed to, but this doesn’t look much different than the other times the 2 sides agreed to delay or suspend tariffs. This isn’t a grand deal where tough decisions were made. That explains why the stock market didn’t roar higher on Friday. This mini deal was already priced in.
It's surprising that stocks didn’t selloff in a ‘buy the rumor sell the news’ trade. It’s been clear over the past year that the stock market doesn’t need to see a trade deal to rally. Now it just needs the 2 sides to avoid escalating the situation by adding new tariffs.
Specifically, there will be no new tariffs on December 15th and the tariff rate in the September tranche of tariffs. That was on $110 billion of goods will be cut in half from 15% to 7.5%. $250 billion of goods tariffed at a 25% rate will stay in place. That’s a relatively small amount of tariff relief.
As you can see from the chart below, America is rolling back $33 billion in tariffs on Chinese imports with $72 billion left across 5 lists of products.
The market is happy this is headed in the right direction, but this is far from a complete deal. This relatively small amount of tariff relief makes it look like America didn’t get a bad deal. Details on intellectual property protection and the opening of China’s financial markets are uncertain. China will be buying $50 billion in U.S. agricultural goods next year. We’ve already seen China agree to purchases that America said they failed to deliver on.
What This Means For Markets
At the least, this means there won’t be any new tariffs in the next few weeks. It’s entirely possible that China doesn’t buy what it stated it will buy causing America to raise tariffs again. That would be problematic near the election. Some traders are cynical of this whole situation because they think stocks keep rising on trade deals that don’t happen. Reality is stocks are rallying because they see a cyclical upturn.
As you can see from the chart below, in the week of December 6th, the ECRI leading index’s growth rate fell 0.2% to 2.2%. Actual index fell 1.9 points, but growth barely fell because the comp was very easy. This trade war is a side show.
It’s possible to be bullish on stocks while being skeptical of the possibility of a real deal. I think now that this situation won’t be on the forefront of everyone’s minds and some of the tariffs are gone, the new political worry will be the election. Specifically, I expect stocks to fall if a left leaning candidate such as Bernie Sanders is nominated.
Update On Democrat Primary
If you thought that the few days before the Democratic debate wouldn’t have much news, you were wrong. All 7 of the candidates that made the debate aren’t going as of Friday. They are supporting the union of food service workers who are protesting for better wages. Democrat National Committee will likely find a solution and the debate will go on. If it doesn’t happen, it will probably be rescheduled. It’s at a tough time anyway since it is just 6 days before Christmas.
Let’s look at the latest polls now. All the candidates beat President Trump in California which isn’t a surprise since it’s a blue state. Trump beats all the candidates in Texas. And Trump beats them all in Wisconsin except Biden who leads by 1. If Biden wins the nomination, Wisconsin will be on of the most important states in the election. There were 4 state primary polls. In Wisconsin Biden leads Sanders by 4 points. This will also be one of the most important races in the primary.
In Texas, Biden leads Sanders by 20 points. He does well in the south. That’s what makes his only 7 point lead over Sanders in South Carolina surprising. He led by 20 points in the previous poll. This was his smallest lead ever (17 polls in 2019).
Finally, Biden leads by 1 point over Sanders in California. This is the big prize on Super Tuesday which is March 3rd. California has the most delegates. However, California isn’t winner take all; it’s proportional. Candidates who receive 15% or more votes will get some delegates. If this poll is correct, Warren, Biden, and Sanders will get delegates.
Details Of Friday’s Action In Markets
S&P 500 only increased 1 basis point because this trade deal was light on details and only lowered some tariffs. Technically, this was another record high. VIX fell 1.31 to 12.63 which is extremely low. CNN fear and greed index rose 1 point to 75 which is extreme greed. This index has been at greed or extreme greed since October.
Interestingly, the AAII investor sentiment poll showed the percentage of bulls burst higher in the week of December 11th. Maybe that’s because of the jobs report and the trade deal. Percentage of bulls increased 5.9% to 37.6% which is just 0.4% below the historical average. And percentage of bears fell 3.1% to 26.1% which is 4.4% below average.
Nasdaq was up 0.2% and the Russell 2000 was down 0.42%. Apple stock rose 1.36% to another record high. It is up 74.23% year to date. It’s wrong to suggest stocks with high market caps can’t be big winners or losers because so many people are following them. There are opportunities for alpha everywhere you look.
It’s no surprise the tech sector was up 0.64% because Apple rallied. It and utilities were the best performers. Utilities were up 0.84% for the same reason financials fell 0.47% and the Russell 2000 fell: rates fell. Treasury market snuffed out this trade deal which didn’t have many details. 10 year yield fell 7 basis points to 1.82% and the 2 year yield fell 5 basis points to 1.6%. Energy was the worst performer as it fell 0.91% because investors weren’t impressed with phase 1 of the deal.