The last two weeks have been dominated by concerns over the ongoing trade wars between the United States and China. While an increase in tariffs from 10% to 25% on $200 billion of Chinese products entering the US was announced by President Trump last Friday (May 10). It seems to have taken the markets until Monday morning (May 13) to acknowledge the news.
The result was a classic fear response: stocks selling off and down over 2.0%, with gold (+1.2%), the Swiss franc (+0.8%), US long-term bonds (+0.7%), and the Japanese yen (+0.4%) all rising in compensation:
Notably absent was the US dollar. As the currency priced on the foreign exchange market did not receive a safe-haven bid, although “dollars in the future” (bonds) did.
Trump: Will He Sabotage His Re-Election?
At this point, we need to pause and consider the chain of events which are soon to dominate world markets. President Trump – a long shot in the 2016 polls who pulled off a come-from-behind victory – is only 18 months away from his potential re-election night. While on the surface it appears that Trump is well-meaning in attempting to protect US manufacturing from inexpensive Chinese products, each time the President announces a new round of tariffs he inevitably sends US markets into a tailspin.
Yet Trump clearly cares about the performance of the US stock market. Indeed, he has commented on (almost cheered on) the record Dow and S&P 500 highs which have occurred during his presidency with a regularity not witnessed amongst modern administrations:
So we must thus ask ourselves logically:
- If Trump wants a strong stock market into the November 2020 elections 🡪 and
- the stock market falls every time Trump implements new tariffs against China 🡪 and furthermore
- China continues to retaliate by imposing its own tariffs against US agricultural commodities, which target Trump in his primary support region within US mid-western states, then…
- Is Trump really going to “shoot himself in the foot” by continuing to impose further tariffs on China during the 18 months prior to the election? Is he going to escalate this trade war into a full-blown deflationary spiral which single-handedly triggers the bear market in US equities which we believe is otherwise due sometime within the next several years?
Our best assessment: no.
Trump is not politically obtuse; he can observe cause and effect just as clearly as you and I can.
He is not going to bring down the entire US economy through self-inflicted trade debacles with China. Especially, just prior to a re-election campaign.
We should, therefore, in a highest-probability sense, not expect the news events of the preceding 10 days to continue to predominantly impact world markets going forward.
What we are deducing is that the trade wars will subside between the two largest economies in the world… at least over the next 18 months.
It is more important, politically speaking, for the status quo to be upheld.
Late Week Recovery
By the end of the week, markets had largely reversed their fear reaction of the previous few days. Let us view the entire period in sum, examining the same safety assets as above, yet this time from the stock market’s all-time high set on May 1 at 2954 on the S&P 500, through the close of the week:
Notice that the big impulsive fear day, Monday, May 13, actually represented the bottom (thus far). in the stock market and the top in most safety assets.
This is why we never recommended investing based on news events alone. Ironically, for fundamentals-based investors, the worst news for a market tends to come out near the exact bottom. While the best news tends to come out near the actual top.
Takeaway on US / China Trade Wars
Most safety assets formed negative reversal patterns last week after initially buying into the trade war fear.
And the stock market – although it finished down for the week in sum – recovered most of its losses by Friday.
President Trump is nearly single-handedly initiating the campaign on trade wars against China. Each time he initiates or increases tariffs, the stock market sells off in mini-panics.
Yet this same man is up for re-election next year. Let us expect him to do everything within his power to maintain a stable to rising US stock market until the election.
BULLION EXCHANGES MARKET ANALYST
Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency.
Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.
This article is a third-party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.