Stocks finished higher once again as the U.S. announced that it had reached a Phase I trade deal with China and would defer any additional tariffs at this time. While the Trump Administration is trumpeting this deal as a great boost to American growth, it is unlikely to move the needle much. Discussions on Phase II will commence but don’t expect any significant near term progress.
If you listen to both sides this morning you would think that they are reading two separate agreements. The Chinese are extolling the benefits of tariff rollbacks, but the U.S. doesn’t appear to be conceding that any rollbacks are imminent. The U.S. is talking about $40+ billion in agricultural exports to China. China won’t confirm that number and appears to be talking about a more muted amount. The real answer is almost certainly somewhere in the middle. Once China begins to increase agricultural imports and take other steps that will improve the balance of trade, the Trump Administration will move to reduce tariffs. The devil is always in the details and whatever agreement has been reached still needs to be translated into each other’s language. Signing at the administrative level is still scheduled for mid-January but don’t be surprised if that slides a bit.
All in all, the deal certainly isn’t a minus. Time will tell how much of a plus it might be. American companies will not be expanding manufacturing within China except to make goods to be sold within China. Supply chains take a while to move but the movement out of China is ongoing. Some of that may return to the U.S. but, so far, there are few signs that substantial movement toward our shores is happening. Rather, the widened supply chains are being spread throughout other parts of Asia for the most part. What will bear watching in the months ahead is whether this relatively small Phase I is enough to get U.S. firms to increase investment spending. That will probably depend on world GDP growth. There is little question that the world started 2019 with excess inventories at a time when growth was slowing partly due to tariffs, but more likely related to tighter U.S. monetary policy. Since mid-2019, the Fed has reversed course, and, as we noted last week, fiscal spending around the world appears to be ratcheting higher. That should stimulate demand which, in turn, could result in some increase in investment spending. If inventory liquidation has run its course, and that timing will vary from industry to industry, that would be a further catalyst to higher spending.
As a result, the economic outlook for 2020 appears marginally higher than it did just a month or two ago. The threat of tariffs hasn’t disappeared. President Trump loves to wave the threat of tariffs to improve his position in the world economic trade wars. Lately, he has been waving that threat against Europe. Whether it proves to be merely a threat or not, only he knows. But once again, uncertainty caused by policy that corporate managers can’t define impacts their commitment to make new investments. As in sports, when you know the rules of engagement, you can make a game plan. Canadian football and American football are different because the fields are of different size and Canadian football only gives three attempts to get a first down rather than four. Therefore, their version is more wide open and pass oriented. Corporations invest for 10-40 years. Presidents rule for 4-8 years. Stable rules will increase investment. Last week’s deal with China is a small step in the right direction. But it really hasn’t changed the rules of engagement. The fact is that China is going to be our biggest economic threat probably for decades. As a result, more U.S. manufacturing is going to move away from China over time.
Markets are now in the home stretch for 2019. It has been a very nice year. Hedge fund managers who get paid for annual performance are happy to lock in gains to take a few weeks off to celebrate. Taxable investors are finishing tax loss selling. Most selling has been concentrated in the energy, basic material and industrial sectors. If 2020 is destined to see real economic improvement, there are probably more than a few diamonds in the rough in these three sectors beaten down by tax selling pressures. On the other hand, groups viewed as bond proxies, like the utilities, had a very nice 2019 but will be hard pressed to repeat if rates move higher in the new year.
Normally, late December is a good time for stocks. Selling pressure overall is light and investors look optimistically to the next year. While the 2020 Presidential election could become a big factor as the year progresses, at this juncture there are too many unknowns to make any rational decisions. It’s like predicting whether it is going to rain in June or not. That means staying the course, upgrading portfolios and sticking to your asset allocation makes the most sense.
Today, Benjamin Bratt turns 56. Musician Benny Andersson of ABBA turns 73.