The Dow fell 1.6% last Tuesday on news that Trump was expanding the trade war with China. Since that time the Dow rose 2.7% on rumors that a deal was imminent. The trade war remains one of the most substantial risks to the global economy and the market appears to be spinning on news and partial news. Friday was a good example when the Dow rose as much as 500 points after Trump tweeted about progress on a deal with China, but then gave back 200 of its 500 point gain when investors realized that the deal with China was more of a truce than an agreement.
At this point it appears that China agreed to buy around $40 billion in American farm products (though the timeframe was not specified). Trump emphasized the step as a “substantial phase one deal”. Meanwhile, China said “substantive progress” on a range of issues was made but did not say anything about a commitment to buy American farm products. The details will need to be worked out in the coming weeks. Meanwhile, investors are concerned about trade war escalation, including planned tariff increases in December on electronics, apparel, and other imported goods. Expect more volatility while this trade uncertainty remains.
Despite the worry however, the U.S. stock market is within sight of a new record high. The reason is simple. Beneath the dizzying headlines and daily swings due to trade deals, or impeachment news, U.S. companies continue to do well. Revenues and earnings continue to rise and, as we have said many times, earnings drive stock prices. While the daily news may seem dizzying, U.S. corporations have shown impressive resiliency. Forward earnings, analyst expectations for futures earnings, have risen to near record highs.
We continue to be cautiously optimistic with regard to the U.S. economy and the market, and remain committed to our long-term, diversified strategy. While the trade war with China is a risk, a deal with China could help propel further growth. Focusing on fundamentals is a good way to navigate this type of uncertainty. As of right now, fundamentals remain good despite the daily ups and downs and the worrying headlines.