President Trump’s highly anticipated meeting with President Xi resulted in the best possible outcome any investor could have hoped for because finality and ultimate clarity were never actually on the table. But the brief talk went well enough that the additional tariffs on a new $300 billion of [largely consumer] products are not proceedings as President Trump had previously threatened. Reportedly, China agreed to large purchases of U.S. agricultural product while negotiations continue, and the Huawei ban has been temporarily lifted. It was by all practical definitions, a “cease fire” – but not yet a resolution. Prior tariffs continue, unfortunately, but no new tariffs are being imposed yet.
The investor takeaway should be rather obvious after the Buenos Aires meeting of last December – declarations of “progress” and “unity” are good, and better than the alternative (of escalating tariffs), but are obviously at risk of quick and unexpected reversal. For until a deal is done, and we really do not know what gaps still exist, the macro risk of uncertainty cannot be taken lightly. In fact, if one believes that the ultimate deal will only happen when pain reaches a point that forces one or both parties to get one done, you could argue that “truces” and “pauses” merely delay the pain that may prove necessary to create finality.
And how did the market respond?
Not surprisingly, the market opened up 250 points on Monday morning. And not surprisingly it closed the day up just 100 points. Tuesday at press time it was pretty darn flat. China’s market rallied as well, and the Nikkei in Japan ripped higher.
Anything else need to be said?
There is not a trade deal between the U.S. and China at this time. There have been “pauses” before that ultimately did not lead to the resolution market participants are waiting for. Our view has been and continues to be that a deal will get done (that was our view even at the peak of the uncertainty back in May), but that the timing of finality is totally unknowable. It would be completely reckless to not assume that volatility is still very likely from this point forward as if anything the market expectation is even more vulnerable to headline risk and setback.
And get ready for this refrain, too: “Well, if the Fed was prepared to cut rates as insurance against the trade war, maybe this makes them less likely to cut now?” It is flawed because the Fed’s recent talking up of a rate cut never had anything to do with the trade war. It was, and is, buyer’s remorse over the last couple of rate hikes and what they did to credit markets (liquidity). Inflation expectations remain well below their target, and that will be the rationale when they go forward with a rate cut despite the trade war issues seemingly de-escalating.
2019 did what?
The first half of 2019 represented the strongest half of a year performance for the S&P 500 since 1997 (and by the way, adding to last year’s theme of “all-time high phobia,” feel free to note the 33% return of full-year 1997, the 28% return of 1998, and the 21% return of 1999). The month of June was the strongest June for the S&P since 1955 and the strongest June in the Dow since 1938.
The bond market has not been left out of the party, itself. The index advanced over 5.5% for the first six months of 2019, led by collapsing interest rates across the term structure.
The top-performing sectors in the S&P 500 were Technology, (+27%), Consumer Discretionary (+22%), and Industrials +21%). The worst performing sector was Health Care (still positive +8%) and Energy (+13%).
The Q4 2018 collapse was followed by a V-shaped recovery in Q1 2019. And then May’s drop in 2019 was followed by a V-shaped recovery in June 2019.