Why The U.S.-China Trade Agreement Will Continue The Bull Market

by: Steve Wojtowicz
Summary

Economists estimate there has been an 11% loss in growth throughout the S&P 500 due to trade tensions.

Trade war between China and the U.S. is the biggest threat to the U.S.’s 2019 economy.

China experienced only 6.6% growth in 2018, which was the slowest economic growth within the last quarter century.

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By Tom Danner, Nicholas Fugarino, and Steve Wojtowicz

Introduction

Despite talks of a possible recession in 2019, the U.S. stock market continues to rally and hold strong, but will it last? We predict that the U.S. stock market will continue to enjoy a bull market in 2019 due to the expected trade agreement between the United States and China. In 2019, the stock market has rebounded well from the large decline in December. We recommend investing in the Vanguard S&P 500 ETF (NYSEARCA:VOO) to follow the growth of the S&P 500 as the trade negotiations continue to progress towards a deal. With the help of a trade agreement between the two most prominent countries in our global economy, the U.S. stock market will benefit significantly and further increase stocks throughout the country.

Why the Trade Agreement Will Happen

The trade agreement between China and the U.S. will be beneficial not only for their individual economies, but for the world economy as well. Given that these are the two largest economies in the world, most of what happens within these countries affects a majority of all other countries. If they raise tariffs back and forth it would most likely result in negative effects throughout the global economy. However, if an agreement is reached, most countries would see an increase in their economies and they would no longer feel like they’re walking on eggshells. In addition, it is quite possible that the deadline will be extended further. President Trump had mentioned in the past that he wouldn’t extend the deadline past January 1st but then proceeded to push it back to March 1st, then again to the end of March. Currently, there has not been much headway, although they are currently in talks and both sides seem to be in good spirits. President Trump is optimistic, but says there will be no deal until both presidents meet in person. He has a decision to make. He can either continue to hold back and not budge, or he can accept a deal to ensure economic growth. The fact that he came to an agreement to open the government back up may be a sign he is softening his approach, showing optimism for those hopeful of a trade agreement.

Why the U.S. Needs the Trade Agreement

The trade war between China and the U.S. is the biggest threat to the U.S.’s 2019 economy. Market volatility can be stopped, or at least decreased, with a trade agreement between China and the U.S. With the Federal Reserve deciding to hold rates steady, that leaves the trade war as one of the main factors pulling the markets downward. Furthermore, economists estimate that there has been an 11% loss in growth throughout the S&P 500 due to trade tensions. This study by the Renaissance Macro Research shows that the repeated negative trade news deterred the S&P 500 undoubtedly. Once an agreement is made between China and the U.S., the markets will see a steady amount of growth.

Why China Needs the Trade Agreement

China experienced only a 6.6% growth in 2018, which was the slowest economic growth within the last quarter century. China’s main indexes have shown very slow growth, and it’s clear that the continuing trade tensions are assisting in the slowdown of the world’s second-largest economy. With China’s slowing economy, the last thing they want is a trade war with the U.S. Surely, this extended trade war will negatively affect an already slowing economy.

U.S./China Trade Negotiation Timeline

May 11, 2017: Trade deal between the U.S. and China that includes beef and poultry, but the disagreement between steel and aluminium persists.

Jan. 22, 2018: Trump administration announces tariffs on solar cells and certain washing machines.

Mar. 8, 2018: Trump authorizes tariffs of 25% on steel and 10% on aluminium.

Apr. 1, 2018: China implements tariffs on $3 billion worth of U.S. goods.

May 3, 2018: The U.S. and China meet in Beijing but are unable to find a solution.

June 15, 2018: Trump administration says it will put a 25% tariff on $50 billion of Chinese goods because of the intellectual property and technology theft, along with other unfair practices. Beijing retaliates by announcing tariffs on $50 billion of U.S. products.

Sept. 17, 2018: Trump announces 10% tariffs on $200 billion of Chinese goods with a plan to increase to 25% at the start of 2019. He threatens additional tariffs on $267 billion of Chinese products if Beijing retaliates.

Sept. 18, 2018: China says it will put tariffs on $60 billion of U.S. products in response.

Nov. 1, 2018: Phone call between Trump and Xi restarts trade negotiations.

Nov. 26, 2018: Trump tells the Wall Street Journal that he will not extend the deadline of January 1, 2019, and that he may put an import tariff of 10% on Apple's (NASDAQ:AAPL) iPhones and laptops.

Dec. 1, 2018: Trump and Xi Truce, Meeting at G20 in Argentina, Trump agrees to delay tariff increases to 25% on $200 billion of Chinese goods and sets deadline to make a deal for 90 days.

Dec. 29, 2018: Trump announces the trade deal is “moving along very well” after a call with Xi, although what has been done is unclear.

Jan. 7-9, 2019: The U.S. and China meet in Beijing for 3 days to discuss more trade negotiations.

Jan. 30-31, 2019: The U.S. and China meet in Washington, D.C., to continue trade negotiation discussions.

Feb. 21-24, 2019: Trade talks continue in Washington, Trump meets with Liu He in front of media to express optimism about the trade deal, Trump extends trade agreement without citing a specific date. President Trump expresses hope that Xi will meet with him at his Mar-a-Lago resort in March to finalize a deal.

Chart Analysis

Shortly after (most) negative announcements - S&P 500 showed decreases.

Shortly after (most) positive announcements - S&P 500 showed increases.

Although no trade agreement has been made yet, we can use the displayed S&P 500 chart above as a way to show how the index reacts to the U.S. and China trade negotiation timeline. When observing, we can see that after a positive announcement there is an increase in the market, and inversely when there is a negative announcement there is typically a small decrease in the market. This may show that investors are in favor of the trade war coming to an end. Trump knows that making a deal will help the economy and, wants the economy to be strong during the upcoming elections.

Similar Instances

There was a similar situation in 2017 when the U.S. announced they would be leaving NAFTA. Many people became worried trade between Mexico and Canada would change drastically and the markets became pretty volatile. However, once the countries announced the United States-Mexico-Canada agreement (USMCA), the markets reacted positively as people were no longer worried about tariffs between our north and south borders. This is evidence to display how the markets react positively when a trade agreement is made.

Conclusion

Ultimately, when the U.S. and China come to an agreement regarding trade, by the end of March, the U.S. markets will remain in bull territory and there will be great economic growth. We believe that a good investment would be to invest in Vanguard S&P 500 ETF. This will allow you to passively follow the trends of the S&P 500 which will continue to rise throughout the year following the impending trade agreement. Investing money into the S&P 500 will give you the opportunity for good returns, especially since a significant amount of companies in the S&P 500 have an established business with China. An agreement will attract an increase in business between the two countries, especially with the reduction in tariffs. As we continue to follow along the U.S./China trade war, the U.S. stock market needs a resolution in order to stay in a bull market run. If no agreement is reached, corporate profits will suffer and the U.S. stock market will gradually lower as economic growth will be hindered.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.