He did it. About 18 months after imposing tariffs on China and triggering a trade war, President Trump and his team negotiated a truce. On January 15, 2020, China’s vice-premier joined the U.S. president at the White House to sign what they are calling “phase one” of a trade deal that needed to happen. Something had to give–it did–and investors will benefit.
Among the key highlights of the deal: As reported by Reuters1, in exchange for the U.S. cutting the tariff rate it imposed on $120B worth of Chinese goods in September from 15% to 7.5% and suspending the tariffs that were supposed to take hold in December on about $160B worth of Chinese goods, China also suspended its retaliatory December tariffs and promised to buy $200B more in U.S. goods. This is 50% more than China bought in 2017. More specifically, China promised to buy $77.7B more in manufactured goods, $32B more in agricultural products and $37.6B in services from U.S. businesses. Phase one of the agreement also includes provisions to safeguard U.S. intellectual property and opens the door to a more open market in China. According to Bloomberg2, global investment banks have the first opportunity to walk through that door and tap into China’s $21 trillion capital market without having to enter into a joint venture arrangement with a China-based company and give up a controlling interest–which has been the requirement for foreign companies entering China to this point.
This is a big deal and a good one for the U.S. and the rest of the world as it will help enhance global growth numbers for quarters to come. The agreement did not repeal the 25% import tax imposed on some $250B of Chinese goods that largely impact U.S. manufacturers. That said, somehow these manufacturers have seemed to figure it out and pass on or absorb the added costs. The tariffs that were supposed to take hold in December would have been much more hurtful to the U.S. because they targeted consumer products. That’s why this deal was necessary–especially politically for President Trump, who is gearing up for a re-election run and measures his success on the success of the stock market.
As an investment advisor, I think the stock market is a fantastic forward indicator of the health of the economy. While there is no question President Trump is a polarizing figure–people either love him or hate him–it is also true that he has done something no other U.S. President has done in getting China to the table to sign a deal. It’s also true that his administration’s policies have led to historically low unemployment and interest rates and put more money in people’s pockets in the form of disposable income. The U.S. economy is strong and so is the stock market. And when the stock market is strong everyone wins, whether you are earning $50,000 a year or $50M, because it touches everybody and every investment vehicle, from RRSPs and mutual funds to stocks and bonds.
As the trade deal evolves and becomes more expansive with (hopefully) phases two and three, in my opinion this bull market will continue to climb, regardless of how old it is. For investors concerned the good times cannot go on, bull markets don’t die of old age like people do. Just because we’ve had a bull market for 10 years, there’s nothing precluding it from continuing for another five years. To say I’m not going to invest my money because I don’t like Donald Trump, or because the bull market has gone on so long, is not valid. I know a lot of people who have kept their money on the sidelines because they thought a recession was going to happen five years ago. That was when the Dow Jones Industrial Average was hovering between 15,000 and 16,000. Today, it’s about 29,000.3
My best advice to investors: set the right expectations, have a plan and be prepared to ride out dips in the market because they will be followed by growth. As we enter 2020, valuations are high given the gains of 2019. This means there will be a bit of a reduction in how much will be made this year, but, in my opinion, it will be a relatively good year. Phase one of the trade deal is a promising signal of what’s to come. I think we can easily have a year where the markets are in the high single digits.
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