Trade Meeting Between China & America Canceled

Trade Meeting - Weak Tuesday

The stock market fell sharply on Tuesday. It was overbought, and the existing home sales report was shockingly bad. Also, the White House canceled the trade meeting with China.

S&P 500 was down 1.42%, Nasdaq was down 1.91%, and Russell 2000 was down 1.69%. I don’t think the government shutdown is playing a role in the stock market action. But it could at some point because the consumer sentiment index was hurt by it.

It remains to be seen if the decline in sentiment affected spending. We don’t even know how retail sales did in December let alone January. It would be great to have the data that has been delayed by the shutdown. The latest Redbook report will give us some clarity on Wednesday.

Trade Meeting - Shutdown Continues

This government shutdown has now lasted 33 days which is 12 days longer than the prior record.

Friday is important because that’s when government workers would get paid next if the government was open. The share of clicks on indeed.com from IRS workers is up 30%.

It’s highly unlikely the government shutdown will last until tax returns are set to go out. However, it looks like I will be wrong about the shutdown not lasting until Friday.

The chart below shows the various estimates of how much the government shutdown will affect GDP growth.

Since it’s very difficult to project GDP growth without government economic reports, it makes sense to see how much growth is hurt by the government shutdown since none have come close to this length.

As you can see, the estimates for the negative effect a one month shutdown will have on GDP growth range from about 0.5% to 2%. The effect on Q4 GDP growth will be relatively small as workers would have had off during the holidays anyway.

Trade Meeting Canceled

Let’s discuss the trade war. Many investors were counting on this type of meeting between America and China to accelerate us closer to a trade deal.

My theory is when the two sides are talking, differences can be worked out. To be clear, in negotiations sometimes there are stalemates.

This posturing takes a lot of time, but sometimes works. One big problem with these negotiations is trust. If each side doesn’t trust each other than it’s tough to get anything done.

Many investors like myself don’t believe China will eliminate the trade deficit with America.

Specifically, the White House rejected a trade planning meeting because of disagreements over intellectual property rules.

In theory, it would make sense to discuss the differences instead of canceling the meeting. Either the White House doesn’t think China is serious or it thinks China isn’t close to where it needs to be.

Trade Meeting - Another aspect to this is the weakening Chinese economy.

We know President Trump is using the Chinese weakness as leverage in this trade dispute because he tweeted “China posts slowest economic numbers since 1990 due to U.S. trade tensions and new policies.”

China’s data actually wasn’t all weak. Industrial output in December was up 5.7% year over year which beat expectations for 5.3% growth and the 5.4% growth in November.

Chinese GDP growth in Q4 was 6.4%. It was 6.6% in 2018 which was the weakest reading since 1991. China could be planning to wait until President Trump’s term ends. Trump is putting pressure on China by saying its economy is weak to get it to make a deal now.

It’s also important to note that cracking down on China is a bipartisan issue. It obviously depends on which Democrat wins the 2020 nomination. But it wouldn’t be a surprise if that candidate also views China as an adversary.

Trade Meeting - Stocks Still Overbought

1 down day doesn’t mean stocks aren’t still overbought. The S&P 500 is still up over 5% year to date. That’s better than many forecasts for the whole year.

Weak Q4 earnings guidance doesn’t imply stocks should ramp higher this year. The CNN fear and greed index stayed at 51 which is neutral. The difference between stock and bond returns is showing extreme greed. Stock breadth and the put to call ratio are showing greed.

All sectors fell on Tuesday except utilities which rose 0.14%. The two worst sectors were energy and industrials which fell 2.2% and 2.07%.

Trade Meeting - Treasuries Market

Treasury yields have been creeping up in the past few days. The 2 year yield is at 2.58% and the 10 year yield is at 2.74%. 2 year yield bottomed at 2.38% on January 3rd and the 10 year yield bottomed at 2.55%.

The difference between the 2 yields has remained almost the same since the bottom as it is currently 16 basis points. That’s only 5 basis points above the closing low in early December as the difference reached 11 basis points.

Relatively speaking, since the S&P 500 is up over 5% year to date, the movement in treasuries has been muted. The 10 year yield is up 6 basis points and the 2 year yield is up 9 basis points year to date.

Trade Meeting - Fed Meeting Next Week

With the uncertainty over the government shutdown and trade war with China, the Fed meeting next Wednesday isn’t being discussed much.

That’s because there is a 99.5% chance the Fed will keep rates the same. Currently, there is a 71.8% chance the Fed keeps rates the same all year.

The Fed can easily say something that’s dovish or hawkish which can change those odds. I think there’s a better chance the Fed is dovish than hawkish.

I’m not 100% sure if the Fed has access to the government economic reports which haven’t been released yet. Either way, you definitely don’t want to ignore this meeting even though it doesn’t have the hype that the December one had. I expect stocks to rally modestly if the Fed is dovish.

If it’s hawkish, stocks will fall. The Fed won’t raise the number of hikes it expects this year, but it could state a hike in the first half of 2019 is likely.

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