July was another positive month for the S&P, but the “feel-good” period after June G20 meeting in Osaka, Japan lasted only one month. Threats of additional tariffs by the US on Chines import, along with the concern that China is now playing “stall ball” on trade until the 2020 presidential election, has roiled the markets as July turns into August. As we go to press China has taken the “tit-for-tat” trade war to a new level and the markets clearly don’t like it.
China is determined to counter the effects of US tariffs and maintain their target growth rate of 6-6.5 percent, but it won’t be easy. As we mentioned above, the government seems to have chosen a path of “waiting out” the US and President Trump rather than give in. Why? Iris Pang, and economist form Dutch bank ING, said it was because “a full-blown trade war is unlikely to help President Trump’s chances in the 2020 election.
Already, President Xi’s government has undertaken monetary stimulus, tax cuts, and now currency devaluation. On the horizon: fiscal stimulus. China is under considerable economic pressure right now, arguable more than the US.
The US economy is in pretty good shape as we enter the month of August. Last Friday’s jobs report showed a gain of 164,000 jobs in July, with the unemployment rate at 3.7%, the best in 50 years. As one would expect, given the positive employment situation, the consumer is doing their part. Confidence rebounded strongly in July, and retail sales have grown at an annualized rate of 4.8% over the last two months. Trade worries and higher prices due to tariffs are a concern, particularly in export industries like auto, tech, and agriculture.
Disconcerting as a 6% pullback is, we see the current situation as another example of news-driven volatility. It is not the result of a fundamental market driver. While we respect the effects of this trade war on global sentiment and activity, we find it hard to build a case for a prolonged negative period for stocks… not in the least due to stimulus now being provided by global central banks.
The bottom line: The United States, the Euro area, and China are either already cutting rates, or are on the verge. Remember the old adage: “Don’t Fight the Fed” (…or the European Central Bank….or the People’s Bank of China).