Presidential Trade Pronouncements, A Real Concern Or A Tap On The Brakes?

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by: Bill Kort
Summary

If you were rattled by Thursday's and Friday's negative market gyrations, you may find some solace in the idea that the President most likely wants a second term.

Unless there is a black swan negative event, equity prices will probably be higher a year from now (maybe significantly higher).

This is regardless of any current trade conflicts with China and others.

- First and foremost, this is not meant to be a political opinion piece.

- It is meant to be a discussion of my views on recent market action and what appear to be some interesting patterns (coincidences) that I have observed in tandem with the May 2019 record high and the July 26, 2019, record high in the S&P 500.

- My conclusion and theory may calm a few jitters and provide an opportunity for further observation and discussion.

Assumptions

  • President Trump wants a second term.
  • The President knows that a strong economy and stock market are keys to this aspiration.
  • As it pertains to the market, it would be much more beneficial to his reelection prospects to have it running hot in the fall of 2020 than any time before that.
  • Negative tweets and statements on China trade policy, such as we saw this past Thursday, tamp down enthusiasm for stocks.
  • Effectively these pronouncements, whether intentional or not, act as light taps on the brakes keeping the market from racing higher now and possibly running out of gas by election time.
  • I believe that it is possibly what we saw in May, and it may be what we saw Thursday. Below is an excerpt from my post of May 12. BTW, I go on in the post to question and discuss the actual US and Chinese GDP impact of a full-blown trade war … Conclusion, not much (except higher prices for US consumers on Chinese imports).

That was the week that was

It was a perfect example of foolish people, or foolish computer trading antics, as the market gyrated wildly on presidential tweets about trade negotiations. Last Sunday it was the tweet threatening a more-than-doubling of tariffs and new tariffs on Chinese goods, followed during the week by the president's statements accusing China of reneging on the deal. The president then went on with a tweet stating that there was "no hurry" getting back to the table (a tweet he subsequently pulled down).

The market responded with a week of volatility, 500 point swings in the Dow Jones Industrial Average. The S&P 500 closed the week (May 10) down 2.5% from its May 1, all-time-high of 2954. According to Barron's magazine and its "Up and Down Wall Street" column, "Global stock markets shed an estimated $2 trillion in value from Monday through Thursday, or about 3%, based on the Datastream World index from Refinitiv, The Wall Street Journal reported. Those losses came ahead of the Trump administration's threatened hike in tariffs to 25% from 10% on $200 billion in goods from China, which took effect a minute after midnight on Friday on the East Coast."

Friday saw a return to some sanity as the as Chinese, Vice Premier Liu headed back to China with both sides agreeing to continue talking. Both the Dow and the S&P closed higher on the day but still down on the week. (The only reason to keep the stock market open is to see how foolish people can be-published 5/12/19).

As a prelude to the above trade tirade, the S&P 500 had run from a low of 2,351 Christmas Eve 2018 to a high May 1, 2019, of 2,954 (a fresh all-time high), up 25% in less than 4 1/2 months. Spirits were high. Then we had what I would term a (trade) tap on the brakes. The S&P corrected 7.6% by June 3.

By July 26, the S&P made another milestone at 3,027 followed by a quarter point cut in the Fed funds rate Wednesday, July 31. It looked like we were off to the races and, again, we saw what may have been another (China trade) tap on the brakes.

Coincidence? Who knows? However, if you were rattled by Thursday's and Friday's negative market gyrations, you may find some solace in the idea that the President most likely wants a second term. As there is no recession in sight right now (slowdown maybe, but no recession), unless there is a black swan negative event, equity prices will probably be higher a year from now (maybe significantly higher), and this is regardless of any current trade conflicts with China and others. This is my "two cents", my speculation on the "why" of these most recent tariff comments. They may have been a tap on the brakes … "a lot of sound and fury signifying nothing."

What's your take?

P.S. If the above dynamic holds true, it should foster an orderly continuation of the secular bull market that we have enjoyed the past decade. For those in the bear camp, take solace in the knowledge this secular bull will end badly. They always do. I just can't say when.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.