The much anticipated trade deal is here. It is only a partial deal, which the White House has said many times before that a partial deal was not acceptable. What has changed? Both sides have changed a lot for various self-serving reasons. The stock market and the 10-year treasury yield were at a critical juncture that any further escalation of the trade war will push the stock market and economy off the cliff.
Fortunately, both sides came to senses. They made a partial deal that both sides seem to be content with. Prior to the partial deal, the White House sent out several messages about blacklisting 28 Chinese companies and blocking visas for certain Chinese officials. The market had very low expectations about the negotiation outcome. They were happy that the Chinese team came to the table without going home earlier than expected. So what really has changed?
The Chinese side wanted all the existing tariffs removed and the American side wanted all the important issues such as IP protection and state subsidies addressed in a comprehensive deal. Apparently the Chinese will never change its laws to make the deal happen. Both sides are hurting. With the re-election getting closer and closer, the White House had no choice but accept a partial deal. By agreeing to the deal, the Chinese is buying more time to prepare for a possible future in which it loses accesses to the indispensable American technology. All considered, we believe the cease-fire will last until 2020 election, no additional tariff hike in 2020, no removal of existing tariffs either. Anything could happen from now until 2020 election, but the most likely outcome is that the trade war headline risk will be buried for now even though the cold war is still ongoing. This partial deal by no means absolved the trade war between the world’s two largest economies.
The unsigned partial deal left many unanswered questions such as the time table of removing the existing tariffs and possible hikes in the near future, but the market has spoken:
1. The 10-year treasury yield made a slightly higher bottom at 1.510% on October 3rd. The 10-year treasury yield moving higher is good for the equities.
2. The S&P 500 and NASDAQ both made a higher high on weekly basis, the S&P 500 advance-decline line made an all time high, no divergence.
3. The S&P 500 climbed into the lower triangle line after falling below it.
4. Money market funds are at all time high since 2008 financial crisis. Investors have very light exposure to the equities under the trade war risk.
With the interest rate and inflation being so low, the global central banks are pumping money into the system, the odds of a market crash is greatly diminished. What will be the catalyst that will cause the market to breakout?
We know President Trump will do whatever to win the election. Without a rising stock market, there is almost no chance of winning. So the odds are greatly enhanced for fiscal stimulus such as payroll tax cut or whatever President Trump can have control over. With such a huge wall of worry, the risk is missing the market.
Technically, the previous S&P 500 weekly low at 2855.94 could be the low of the summer correction, which could be the 2nd weekly cycle low since the December 2018 low. The confirmation will come when the price breaks out of the top of the triangle.
Even though the S&P 500 hasn’t reached the breakout price at 3076.67, we have taken light positions for some growth stocks. The stock market is on its last rising leg and we believe the S&P 500 target will be 3350 next year.