Written by Lance Roberts, Clarity Financial
On Thursday and Friday, the market surged on hopes that a “trade deal” was coming to fruition. This was not a surprise to us, as we detailed this outcome two weeks ago:
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“‘For Trump, he can spin a limited deal as a ‘win’ saying ‘China is caving to his tariffs’ and that he ‘will continue working to get the rest of the deal done.’ He will then quietly move on to another fight, which is the upcoming election, and never mention China again. His base will quickly forget the ‘trade war’ ever existed.
Kind of like that ‘Denuclearization deal’ with North Korea.'”
As we discussed in that missive, a limited “trade deal” would potentially set the markets up for a run to 3300. To wit:
Assuming we are correct, and Trump does indeed ‘cave’ into China in mid-October to get a ‘small deal’ done, what does this mean for the market.
The most obvious impact, assuming all ‘tariffs’ are removed, would be a psychological ‘pop’ to the markets which, given that markets are already hovering near all-time highs, would suggest a rally into the end of the year.”
This is not the first time we presented our analysis for a “bull run” to 3300.
Every week, we review the major markets, sectors, portfolio positions specifically for our RIA PRO subscribers (You can check it out FREE for 30-days). Here was our note for the S&P 500 previously:
- We are still maintaining our core S&P 500 position as the market has not technically violated any support levels as of yet. However, it hasn’t been able to advance to new highs either.
- There is likely a tradeable opportunity approaching for a reflexive bounce given the depth of selling over the last couple of weeks.
This is the outcome we expected.
- There is no “actual” deal.
- The “excuse” will be this deal lays the groundwork for a future deal.
- No one will discuss a trade deal ever again.
It is almost as if Bloomberg read our work:
“The U.S. and China reached a partial agreement Friday that would broker a truce in the trade war and lay the groundwork for a broader deal that Presidents Donald Trump and Xi Jinping could sign later this year.
As part of the deal, China would agree to some agricultural concessions and the U.S. would provide some tariff relief. The deal under discussion, which is subject to Trump’s approval, would suspend a planned tariff increase for Oct. 15. It also may delay – or call off – levies scheduled to take effect in mid-December.”
So, who won?
China.
- China gets to buy agricultural and pork products they badly need.
- The U.S. gets to suspend tariffs.
Who will like the deal?
- The markets: the deal removes a potential escalation in tariffs.
- Trump supporters: Fox News will “spin” the “no deal” into a Trump “win” for the 2020 election.
- The Fed: It removes one of their concerns potentially impacting the economy.
By getting the “trade deal” out of the headlines, this clears the way for the market to rally potentially into the end of the year. Importantly, it isn’t just the trade deal providing support for higher asset prices short term:
- There now seems to be a pathway forward for “Brexit”
- The Fed is injecting $60 billion a month in liquidity into 2020 (More on this below)
- The Fed has cut rates and is expected to cut again by year end.
- ECB back into easing mode and running negative rates
- Fed and ECB loosening capital requirements for banks (Because they are so healthy after all.)
This is also a MAJOR point of concern.
Despite all of this liquidity and support, the market remains currently confined to a downtrend from the September highs. The good news is there is a series of rising lows from June. With a “risk-on” signal approaching and the market not back to egregiously overbought, there is room for the market to rally from here.
Let me repeat what we wrote back in July:
“As we face down the last half of 2019, we can once again run some projections on the bull and bear case going into 2021, as shown in the chart below:”
The Bull Case For 3300
- Momentum
- Stock Buybacks
- Fed Rate Cuts
- Stoppage of QT
- Trade Deal
However, while the case for a push higher is likely, the risk/reward still isn’t great for investors over the intermediate term. A failure of the market to make new highs, given the amount of monetary support, will be a very bearish signal.
