Summary
- Breaking recently is that Trump has agreed to a limited trade deal with China.
- In exchange for massive agriculture purchases, the U.S. is going to slash current tariffs, as well as cancel planned December 15 hikes.
- Value stocks surged with banks being the main beneficiary, and tech stocks lagged like the Nasdaq.
- Looking for a helping hand in the market? Members of The Lead-Lag Report get exclusive ideas and guidance to navigate any climate. Get started today »
The four most dangerous words in investing are: "This time it's different". - Sir John Templeton
The big news over the last couple of weeks has been on the China trade deal front. As I mentioned in the Lead-Lag report, this has been, in short, an exhausting timeline, trying to figure out what happens next. It looks to finally be advancing at an actionable pace. The saga began in 2018, with Trump applying pressure on China by raising steel and aluminum tariffs from China. That seems like a different era despite it being less than two years ago.
The most recent actions from June and December 2019 have been large and swift movements, finally culminating in enough pressure for both sides to work it out. And just in time too, as if negotiations were going to continue through the weekend and the December 15 deadline date, the back of the consumer could have been broken with additional costs on their holiday gifts. For us investors, it looks like the Santa Claus rally will be coming this year, as uncertainty is being lifted by the day.
The details are still coming out and to be finalized as of writing, but here's what we know so far. The agreement rolls back existing tariff rates on Chinese goods and cancels new ones set to take effect on Sunday. This is in exchange of Chinese purchases of U.S. farm goods and other concessions. The deal apparently calls for China to buy $50 billion worth of agricultural goods in 2020, along with energy and other goods, in exchange for reducing the tariff rate on many Chinese imports. Some reports, like the Wall Street Journal, have stated that it may go up to as much as half of the tariffs in place will be cut on the $360 billion in Chinese-made goods.
This is in addition to cancelling those additional $156 billion worth of goods threatened to be tariffed on Sunday. We will have to watch those agricultural purchases closely, as there is allegedly a "snapback" provision if the agreement is not made. How much is this deal needed by farmers? Well, U.S. farm exports fell from as much as $25 billion in recent years to below $7 billion in the 12 months through May of this year. Not easy to make up those numbers from domestic crop selling, for sure. In recent months, despite some positive rhetoric, purchases are still some 60% below their levels before this all started.
So how did the stock market respond? Resoundingly positive, especially in the value sectors such as the holdings in the iShares S&P 500 value ETF (IVE). The banks really took off, as evidenced in the SPDR S&P Bank ETF (KBE), gaining almost 3% on the day. That is likely due to the yield curve steepening, expecting economic activity to increase, and the curve's effect on the banks' net interest margin earnings. Interestingly, though, not all stocks were as strong as you would think. Technology stocks, like the ones in the Nasdaq (NDAQ), were up only 0.7% on a day where the overall market surged.
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This article was written by Michael A. Gayed. An author on Seeking Alpha and founder of the Lead Lag Report.
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