No Trade Deal With China Means Weaker Stocks and GDP

Originally posted at

Stock prices will stay on the defensive in the months ahead due to the trade dispute between China and the U.S., peak profit margins and downward earning growth forecasts. The equity bull market can be sustained and a recession can be avoided in 2019. However, it will require a resolution on the trade front and likely further U.S. and global economic slowing. The global recovery turned up on cue with Trump’s election and went south upon his planned trade war threats and its implementation.

China’s economic growth rate slowed mildly during the first half of 2018 on concerns over trade and an effort to tighten excessive credit. Recently, though, activity has profoundly declined as the trade war threats begin to materialize. Our view last summer was that Trump wanted China to slow before considering a deal and he will continue to hold out for major concessions even if stocks and the hot U.S. economy lower.

Sources: IHS Markit, Caixin

Outstanding U.S.-Euro trade disputes and financial woes in southern Europe have plagued the Eurozone, but the U.S. – China impasse adds to their troubles. A hard Brexit (no Euro-UK deal) is also likely to happen next March which will require new stimulus efforts to counter the potential for a U.K. contraction.

Sources: IHS Markit, Eurostat

In 2017 Trump helped boost global economies and stock markets. In 2018 he played his tax card, allowing the U.S. to accelerate while the rest of the world slides lower. The U.S. can remain the only clean shirt in the world for only so long before the effect of reduced global trade counters the massive U.S. tax cut, repatriation and factory reshoring stimulus. Manufacturing is still strong in the U.S., but orders are slowing and a PMI breaking down into the lower 50 will confirm a U.S. economic pause.

The good news is that supplier deliveries remain extremely constrained, in need of slower growth to normalize supply chains. If Trump plays his cards right creating a whiff of disinflation, lower interest rates and a GDP near two in early 2019 and then securing a China trade deal, he can skate around potential recession fears and score another growth phase victory later next year.

There is no hint of a recession on the horizon, but such talk along with sub three percent 10-year yields may be required in 2019 along with new China-Euro-U.S. trade agreements before a new wave lifts all boats and stock prices. For now, until these conditions materialize, we expect sideways trading to lower stock prices in the months ahead with some echoes of the pattern we saw in 2015. Short term, with the markets awaiting the key U.S. – China trade talks in early December, it seems likely stocks will trade sideways to higher in November, unless the Democrats control the Senate or if China, or the U.S., calls off the expected trade meeting.

About the Author