The Trump administration’s “monster” trade deal with China helped drive global stocks to records and push currency volatility to all time lows. But the accord excludes $50 billion of U.S. exports and there are doubts China can buy the extra $95 billion in commodities. The deal commits China to do more to crack down on the theft of American technology and corporate secrets by its companies and state entities, while outlining a $200 billion spending spree to try to close its trade imbalance with the U.S. It also binds Beijing to avoiding currency manipulation to gain an advantage and includes an enforcement system to ensure promises are kept. But, there is concern that headline-grabbing pledges of $200 billion in exports to China over the next two years are little more than smoke and mirrors.
The fallout from the trade deal, if it goes badly, could have a long lasting impact on the US economy. But soaring stock prices, a steeper yield curve and a resilient labor market characterized by the lowest jobless rate in a half century continue to alleviate recession fears. Which brings us to the question of “Is the stock market going to hold up, without a major correction, this year or not”?
Future Wealth’s View
The big question we, at Future Wealth, have is, whether a preliminary trade agreement, reached during a period when China-U.S. strategic relations are clearly declining, really work? And if not, how and when does it begin to reflect in corporate results? The trade deal, if it goes south, could negatively impact oil, agriculture, commodities, energy and the list goes on. Investors have to consider the prospect that not all of the aspects of the trade deal will come to fruition and that some of the thorny aspects of the agreement may get prolonged well past the elections and get pushed into 2021 and beyond.
And therein lies the risk for the rest of the year in the stock market. With recession fading into the background and trade deal done, it appears that there is an open road for the stock market to go higher and we continue to stay bullish in our client portfolios. But, we would be remiss if we don’t pay attention to the structural challenges stemming from the trade deal.