China Says Deal, Tariff Man Says No Deal

Has there ever been a Bull market in stocks more connected to the words of one person? Presidential palaver and Trumpian tweets frequently rule day to day market action. In recent months the words coming from the Oval Office have pushed stock prices around in a 10% range repeatedly. In early August, when Trade talks with China stalled, the self proclaimed ‘Tariff Man’, Trump threatened even more tariffs, sending stock indices lower by 8% in just over 3 days. On the day of the August 6th low Trump reversed the decline by stating he’ll reduce tariffs as a trade deal progresses, sending stocks back up 6% in just 3 days. During the persistent 7% stock market rally over the past month Trump has made weekly updates to increase confidence in a coming trade deal with China. It’s no secret that the uncertainty of an escalating Trade War with China has increasingly been perceived as the biggest threat to our stock market and economy since 2018. Without personal prejudice to the decisions emanating from this White House, we conclude that President Trump is well aware of the impact of his words upon investors and has been a master political minefield navigator. After juicing the economy on pro business rhetoric and major tax cuts in 2017 and 2018, Trump helped slow the economy with his creation of a China Trade War. Knowing the consumer and stock market investor are paramount to his success and a run at a second term in office, the President has consistently found a way to bring stocks back to record highs, even after he causes a preceding price decline. As the chart below clearly highlights, words matter as there have been frequent comments from Trump at every major trend change in equities that have immediately propelled prices in sync with publicly expressed Presidential sentiment. While China indicated they had agreed to a trade deal last week while at record highs in the stock market, Trump quickly responded that there is no deal yet and no change in tariffs – yet.

As occurred in the first quarter when stocks persistently shot higher, Trump has again been signaling a strong perception of a partial deal with China over the next month or so, which has kept economic and investor optimism elevated. Everyone has been fooled before throughout this public relations manipulation game that the President plays incredibly well, but it certainly appears the first stage of a major trade deal is forthcoming. We are once again reaching a key inflection point for a make or break decision on planned December tariff hikes that must be addressed. Any break in trade talks with a new round of trade war escalation in December will be received with alarm by investors and may lower economic prospects as well. However, until there are new threats of more tariffs, the stock market is unlikely to sell off more than a few percent. As we show in our SP 500 daily chart above, there has been an impressive technical breakout in the major indices that support another 3 to 6% higher move in valuations from here if a Phase One US and China Trade Deal is signed.

While President Trump has been an adept conductor of investor and consumer expectations at very high levels regardless of fundamentals, it’s worth noting the overbought technical indications developing now. Options traders, small investors and a variety of momentum and sentiment related oscillators are at or near levels that imply resistance to higher stock index prices and a growing risk of a correction. SP 500 Index 3100 is the current short term resistance to watch. Our primary sentiment gauges are highlighted in the weekly chart below. There is room for more euphoria from small investors, but stocks are currently vulnerable to any adverse tweet coming out of our Commander in Chief. 

 Trump stated a month ago on 10-11-19 “we’ve come to a very substantial phase one deal, … a tremendous deal for the farmers.  A purchase of — from 40 to 50 billion dollars’ worth of agricultural products. … would be two and a half times what China had purchased…” Trump’s agricultural claims are actually quite accurate. This would indeed be a major boost to Soybean crop prices upon a trade deal. Not only would Soybeans be a good investment upon a Phase One trade deal, but a breakout over $10.00 will be a strong sign of an end to the trade war and a better environment for stocks and the global economy.

One more modest clue to trade deal confirmation confidence will manifest in Copper prices. As markets become more assured of a China Deal we should see Copper move above the $2.70 to $2.80 summer resistance zone with $3 being surpassed once a deal is actually inked. 

Never has there been a US President so active using social media and the press to shape consumer and investor expectations and to conduct policy initiatives. This can lend to confusion and more sudden market reversals based only on the positive or negative statements promulgated by the Oval Office. While our interpretation of technical and fundamental indicators remain relevant, it’s clear that frequent commentary by President Trump is also quite valuable in shaping the outlook for the stock market and other commodities. Currently our Tweeter in Chief’s rhetoric is conveying cautious optimism, maintaining expectations of a trade deal, while saying there is no urgency.

 

 

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