Trade disputes have been an ongoing soap opera since President Trump took office. From steel tariffs to trade skirmishes with China, Japan, Canada, Mexico, South Korea, and the European Union, among others, it’s been hard to keep track! But over the past few months, we think a trend toward a settlement of these disputes has emerged.
Congress must still act on the new version of NAFTA with Mexico and Canada – USMCA – but as Democrats in the House of Representatives consider impeaching the president, they should also become more interested in showing they’re not only interested in all scandal, all the time. Passing some broad bi-partisan legislation and USMCA would be a good start. Look for it to get passed by early 2020, putting our disputes with our two largest export markets behind us.
From the perspective of US economic growth, the relationship with China has received way too much attention in the past couple of years. Even before the trade dispute started, US exports to China were a smaller share of our GDP than exports to Japan were before the Japanese economy went into a long-term funk in the early 1990s. If the US could prosper in the 1990s in spite of Japan’s problems, the US economy overall should be able to absorb softer demand for our products coming from China, which lags well behind Canada and Mexico as an export market.
But last week’s news indicates a deal is getting close. It will not be a huge deal that comprehensively puts all our trade issues with China to rest; not even close. But it will likely mean no new additional restrictions from now through 2020, and some rolling back of tariffs put in place in the last couple of years.
Meanwhile, the US recently concluded a trade deal with Japan. None of this suggests we are fully out of the woods on trade issues. We doubt China will stop its theft of intellectual property, and so, expect a trade dispute with China to re-emerge in 2021 no matter who wins the presidential election next year. In the meantime, tariffs and the threat of other economic sanctions on China were always more damaging to China than the US. That’s why we never worried as much as conventional wisdom. But nothing that’s happened in the last few years suggests we are entering some sort of Smoot-Hawley-like downward spiral in international trade.
US merchandise imports dropped 70% from 1929 to 1932 while exports dropped 69%. That’s a downward spiral! US imports didn’t reach 1929 levels again until 1946. By contrast, even before the recent trade deals with Mexico, Canada, and Japan have been implemented, US trade with the rest of the world has been rising. In the past twelve months, exports and imports of goods and services combined have been $5.65 trillion, versus $5.63 trillion in calendar 2018, $5.26 trillion in 2017, and $4.93 trillion in 2016. Even without deals, trade could be hitting a record high this year. The US economy has been and will continue to be much more resilient than many think. Trade has increased uncertainty but was never as big a threat as feared. And, as trade relations improve, stocks will make up lost ground. We were never as worried as the conventional wisdom, and now it will come around.
Last week, there were several significant news themes aside from the US-China trade war. US Federal Reserve Chair Powell gave a speech and took questions at the National Association for Business Economics on Wednesday in Denver. During the speech, Chair Powell said the Fed would “begin buying Treasury securities soon,” as the Fed attempts to keep the US financial system running smoothly. Chair Powell went to great lengths to say that the new actions were “not QE.” However, the expansion of the Fed’s balance sheet nearly always has an easing impact on the fixed income markets, so technically the actions are a form of quantitative easing.
The other news of the week last week that moved the overall markets, at least in the US, was the Friday release of the October University of Michigan Consumer Sentiment Index. The markets had been expecting a little weakness in the Consumer Sentiment Index for the month of October, with a reading of 92.0 versus the September reading of 93.2. However, on Friday, the print came out at 96.0, which extended the gains that started last month. The same better-than-expected figures were seen on the Current Economic Conditions index, which beat expectations of 107.5 by posting 113.4 for the month of October.
Equities: Last week was a volatile week for the US financial markets with a more than 490-point gain on the Dow, taking the index into positive territory for the week. The week started with a decline of more than 2 percent across all four of the major indexes through the first two days of the week. Things started to reverse on Wednesday following Chair Powell’s speech and then rode high on Thursday and Friday on trade deal optimism. Despite the market movements, volume last week was below the weekly average that we have seen over the past year.
○ NASDAQ (0.93%) – Below Average volume
○ Dow (0.91%) – Below Average volume
○ Russell 2000 (0.75%) – Below Average volume
○ S&P 500 (0.62%) – Below Average volume