Take a breath
While we ended the week much as we started it, with stocks struggling to find direction amid heightened volatility over increased tariffs and threats of new ones as the White House and China battle over trade. But market angst aside, we continue to believe President Trump simply is deploying “Art of the Deal” tactics aimed at pushing the best deal possible for the U.S. across the finish line. China, no wallflower, is reacting in similar ways, too. At the end of the day, we think both sides ultimately will reach an accord. We just need to recalibrate our expectations on the timing, as we don’t think negotiations are over, they’re simply entering extra innings.
Indeed, the reality is there is time. This morning’s increase in tariffs on $200 billion of goods from 10% to 25% will take weeks to actually take effect as these goods still must be shipped from China to the U.S. In the interim, it’s not unreasonable to expect Presidents Trump and Xi to play hardball as each plays to their base at home. As leaders of the world’s two largest economies, and with personalities to match, neither wants to be viewed as ceding ground. The U.S. may well want to see if the higher tariffs and threats of more on another $325 billion of goods put further pressure on China’s economy provide the leverage and urgency to get a deal finalized.
Either way, it’s not insignificant that as discussions ended today in Washington, D.C., neither side said they’re done talking. Our base case remains that, ultimately, the differences will be resolved, with the U.S. getting verifiable assurances that China’s “Made in China 2025” initiative won’t do to the high value-added industries of the digital revolution in the U.S. what it did to low value-added industries over several decades.
Until then, we view the market’s unease as an opportunity. Markets are in much better shape now compared to last December, when the trifecta of trade war worries, deteriorating U.S. data and an overly aggressive Fed spawned a steep sell-off. While we never subscribed to the idea that markets had fully priced in a trade deal, as evidenced by the market’s measured reaction to the events of the past week, it’s possible we could see the current pullback modestly deepen in coming days. At this writing, we’re down nearly 3%. But once a deal gets struck, we would expect the market to resume its upward trajectory, abetted by central bank support, improving macro fundamentals and diminishing worries about what’s next on the U.S.-China front.