One of the most significant issues facing the global economy is the ongoing, smoldering trade war between the US and China. This tense conflict has been threatening to ignite into a full-scale trade conflict that would derail the global economy, particularly in China where any tariffs would hurt the most, but also around the globe where Chinese slowing could domino to the rest of Asia and Europe, and potentially the US. With so much at stake the world was watching when President Trump and Chinese President Xi Jinping met over the weekend at the G20. While there were few firm answers, we did learn a few things that are overall positive for stocks.
First, we learned that President Trump would like to get re-elected. While this isn’t surprising, Trump’s positive tone, and announcement that he would delay further tariffs and resume trade talks is a solid reminder that Trump really does need a deal despite his tough talk. Trump really needs the US economy to continue to grow in order to get re-elected and a trade war is really the last thing he needs during a campaign. What good would the high tariffs be if they resulted in a new president that is likely to reverse them in a year. It is far better for Trump to get a deal done now, and then potentially renegotiate once he is re-elected.
Secondly, we learned that Chinese President Xi, despite being president for life, really needs a trade deal with the US. After the summit Xi said: “Forty years on, enormous change has taken place in the international situation and China-U.S. relations, but one basic fact remains unchanged: China and the United States both benefit from cooperation and lose in confrontation.” There is growing evidence that the existing US tariffs on Chinese goods, though still modest, are negatively impacting the Chinese economy. Though not facing an election, Xi faces the real possibility of unrest if the Chinese economy derails.
Thus, after meeting together these two leaders both spoke positively of renewed trade talks, and their positive outlook for an ultimate deal. We can hardly count on this outcome, but the odds still favor a trade deal and, as we have said before, an uneasy truce. In the meantime, we can get back to focusing on what really matters for investors: corporate earnings. On that front, earnings continue to grind higher on the backs of rising wages, low unemployment and a strong U.S. consumer, giving us hope that the trade bluster may be merely a side-show in what continues to be a positive environment.