Trump’s G20 bromance with Xi means one thing: an epic Santa Claus rally for stocks
It’s time to charge that extra $5,000 holiday gift because the year-end for stocks could be pretty sweet.
And you can thank President Trump and Chinese President Xi Jinping for the inevitable rip-roaring rally into 2019.
Well, that and investor foe turned short-termed bestie, Fed Chair Jerome Powell.
What happened: Trump and his Chinese counterpart agreed at this weekend’s G20 to delay higher tariffs on $200 billion worth of goods from China; the increase, from 10% to 25% was set to hit Jan. 1. The decision will be a 90-day ceasefire. China will purchase a “very substantial” amount of agricultural, industrial and electronics products, according to the U.S. side.
Trump followed what amounts to a weekend win for U.S. businesses with a late night tweet Sunday that China would reduce and remove tariffs on imported autos. The rate currently stands at a penalizing 40%.
In July, China lowered tariffs on U.S. cars to 15% from 25%. But it then quickly reversed course and enacted a 25% additional retaliatory tariff in response to U.S. tariffs on Chinese products.
A White House spokesperson didn’t immediately return a request for clarification on Trump’s tweet.
Markets around the globe spiked on Monday in response to the cooling of a modern day cold war. The Dow Jones Industrial Average surged more than 287 points. German automakers BMW and Daimler popped 7.3% and 7.5%, respectively, as the reduction of tariffs could unleash better sales in China.
Why it matters: Stocks have had a rough go since hitting record highs in early October. But concerns over an unfriendly Federal Reserve and profit-margin-killing tariffs — the key factors in the blow-off from the October highs — have reversed rather quickly. That’s positive news for the markets.
For one, Powell’s speech at the Economic Club last week suggested he will not move very quickly hiking rates in 2019. Powell realizes that he could tip the U.S. economy into recession if not careful.
Investors could now sleep easier on this front, for a little while at least. With the perception of the Fed being a touch more accommodative, investors are apt to wade back into beaten-up, above-normal risk assets. See battered tech stocks such as Apple, Netflix and Amazon.
Meanwhile, Trump’s ceasefire on his trade war with China removes a significant black cloud hanging over the heads of investors. Companies of all kinds for months have warned on the impact of having to raise prices to offset tariffs. Walmart’s chief financial officer Brett Biggs, for instance, told Yahoo Finance in November the retailer would be forced to raise prices on shoppers if the higher tariff went into effect in January. Walmart, like many retailers, source a good percentage of their merchandise from China.
Other companies have spent most of 2018 figuring out how to diversify their supply chains away from China. That has come at monetary and human capital costs, with more on the way if the trade war continues.
At the same time, with the plunge in soybean prices thanks to China’s retaliatory efforts, America’s heartland has been slammed. Farm bankruptcies are on the rise as farmers are unable to find buyers for their crops.
Blake Hurst, the president of the Missouri Farm Bureau, told Yahoo Finance that his fellow farmers will unlikely be buying expensive equipment in the next year. Hurst says farmers are just trying to survive the year, let alone find ways to justify spending hundreds of thousands of dollars on new equipment.
But with China’s new commitment to buying U.S. agricultural products, the outlook for farmers is arguably vastly better than it was one week ago. That has implications not only for farmers, but for companies like railroads that assist in shipping their products.
Wall Street has used this uncertain backdrop to lower their profit forecasts for S&P 500 companies in recent months. They may revisit those lowered estimates, and in doing so help prop up the markets.
Bottom line: Wall Street is doing its darnedest to poo-poo the weekend’s events at the G20. Unsurprising as many strategists were caught on the wrong side of the trade into the unpredictable gathering.
“Another reason to wait before cheering the end of the trade war is that 90 days to work out a broad agreement is very short. Especially because the agreement should also encompass a deal on more sensitive issues like the theft of intellectual property and forced technology transfers in joint ventures. Most wide-ranging bilateral trade agreements take years to negotiate,” says ING strategist Raoul Leering.
Says Goldman Sachs strategist Alec Phillips: “While the Xi-Trump dinner has clearly improved the tone of the U.S.-China relationship for the time being, and we would expect an initial positive market reaction, the “pause” prolongs the period of uncertainty around the eventual structure of trade relations between the two countries.”
Perhaps.
Common sense says though the trio of Trump, Powell and Xi have set the groundwork for a healthy rally into year end. Uncertainty has been removed and stocks are well off their highs, a recipe for investors to go bargain hunting. Whether that leads to a stock market melt-up like we saw in January of this year is unknown. Either way, the Santa Clause rally is poised to kick into overdrive and bring with it a lot of good cheer to trading accounts.
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Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi
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