The S&P 500, NASDAQ and Dow Jones finished positive for the week as investors became more optimistic on a China US Trade Deal. Since Monday, the S&P 500, NASDAQ and Dow Jones rallied 2.67%, 2.92% and 2.99% respectively.
Much of the rally was fueled by a Trump tweet claiming to have high level talks with Chinese officials. China refuted the claims of talks with Trump, but the communist party issued a statement saying they want “calm” negotiations and no further retaliatory measures. Additional tariffs raised to 15% from 10% on $100 billion of Chinese goods goes into effect this Sunday and it remains unknown if it is priced into the market. Firms with Chinese supply chains have already started looking at alternatives to reduce their reliance on China for the manufacture of their products. India, Vietnam and other South East Asian countries have been making an effort to steal some Chinese manufacturing base and offering very attractive terms for multinationals to relocate.
The coming weeks will be an inflection point as World Central Banks contemplate additional quantitative easing measures and lower interest rates. World growth has slowed and all major economies (ex US) are beginning to show signs of deflation and recessionary pressures. The market has priced a 25 Bps rate cut at 100% probability for September. The market can’t escape its crack and cocaine addiction to low interest rates and accommodative monetary policy and the market expects 2 additional cuts before the end of 2019.
The SPY formed an interesting pattern similar to one experienced last November before the market had it’s worst December since the Great Depression in 1930. The pattern is a large sell off of 7% to 10% followed by 3 separate recoveries and sell offs. This pattern illustrates investors are nervous about the overall direction of the market and willing to capture profits to avoid a large sell off.
Next week will be interesting because of additional tariffs and Hurricane Dorain potentially striking east coast. It remains to be seen if tariffs will cause a sell off in the market or if it is priced in.