Tuesday, April 10, 2018

This Week's Message: It's All About Trade, For Now...

About mid-morning yesterday at the office we discussed the then big rally in stocks (the Dow peaked 450+ points higher on the day). We concluded that the advance had little chance of lasting the day as it was clear from the open that it was predicated upon softer trade talk out of Washington. I.e., given that Chinese President Xi's address at the BOAO Forum was scheduled for the evening, it simply didn't make sense that traders would want to be long at the close.

The fact that the Dow is up over 500 points as I type suggests that -- given Xi's dovish speech last night -- we had the correct narrative, versus yesterday's headline excuse that it was the FBI and the President's attorney that brought the market back down to Earth.

Bottom line; the increased volatility of late has been all about trade tensions.

As for the next move, the ball appears to be back in the U.S.'s court. While Xi essentially repeated the promises China's been making since long before the recent tariff threats (with some evidence pointing to progress in the stated areas, some not), he nevertheless offered Trump an opportunity to claim victory as "negotiations" begin, and, as we suspect at this juncture, a global trade war is avoided.

As we keep explaining, the trade deficit argument is the same old ruse that politicians (from both parties) have used for eons to appease their base and/or their institutional contributors. Again, a trade balance between two countries more than anything else reflects their different stages of development. And the country with the trade deficit enjoys a capital account surplus, which can lead to the greatest (by comparison) gains in productivity. As pointed out by the Mercatus Center's Veronica de Rugby (HT Don Boudreaux):
"Fueling this bipartisan hysteria is the widespread failure to understand that United States trade deficits generally add capital to our economy – more factories, more R & D or more machines."
While the trade deficit is unequivocally nothing to complain about, the theft of intellectual property is a different proposition altogether; and on that we absolutely believe the U.S. has a legitimate complaint. Therefore, that, not the trade deficit, needs to be the focal point of discussions between the two super powers going forward. Let's hope that's the case!

As for the market going forward, earnings season has begun amid the highest of expectations. That sounds good, but, alas, the market tends to fare better (during earnings season) when earnings expectations are in the gutter. This go round, however, could very well be different, as the trade spats have kept the market underwater (relative to the January 26 high) during what is typically the best two months of the year. I.e., a strong rebound, barring more concerning trade news or any other of an infinite number of exogenous possibilities (Syria?), could be in the cards.

Then comes summer, and then comes mid-terms. All the while we'll remain focused on overall conditions during what virtually has to be a period of high volatility...

Have a nice week!

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