Here’s one way to break political gridlock: Send the stock market into a nosedive.
Since the stock market’s dismal performance last December, Washington policy makers have become suddenly eager to appease investors. First came Federal Reserve Chairman Jay Powell’s pivot to a more “patient” monetary policy, with fewer interest-rate hikes in 2019 and possibly even rate cuts.
Now, President Trump is giving financial markets another lift by telegraphing his intent to deliver a trade deal with China, even if he doesn’t get significant concessions. “We want very much to make a deal,” Trump said recently. To prove it, he’s willing to extend the March 1 deadline for a deal he set late last year.
The extension of that deadline has goosed stocks, because Trump is the one making a concession, not China. Investors don’t really care whether China reforms its economy, even though there’s plenty of evidence reforms are necessary. What investors do care about is tariffs, and their damaging effect on profits and economic growth. Trump has already imposed tariffs on about half of all Chinese imports to the United States. And he threatened to impose tariffs on all other Chinese imports if there was no trade deal by March 1.
So markets are relieved there won’t be any new tariffs this spring—and they’re also interpreting the deadline extension as a sign that Trump will ink a deal, whether he gets meaningful concessions or not. Trade experts say China will never agree to certain Trump demands, such as relinquishing control of huge state-owned companies able to throw their weight around in global markets. Nor will China give up pursuit of global dominance in key industries of the future.
Not surprisingly, U.S. and Chinese negotiators remain far apart on those and other structural issues, according to Bloomberg and other news outlets. So it’s telling that Trump would agree to a deadline extension more than two weeks before the day of reckoning arrives. Negotiators normally exert maximum leverage when a deadline is imminent, when they have a club to wield and they persuade the other side they’re willing to use it. Trump has put the club away before he had to.
That’s probably out of deference to financial markets. Trade tensions have depressed stock values since Trump first imposed steel and aluminum tariffs last March. Trump is sensitive to the stock market, viewing it as a barometer measuring his performance as president. He surely noticed that the S&P 500 index fell more than 6% in 2018—a year when many investors expected hefty gains, thanks to sharp cuts in corporate taxes.
Trump doesn’t want another down year for stocks in 2019, as he’s ramping up his reelection campaign. So he has to cave on his trade war with China. He’ll certainly get something, such as a Chinese pledge to buy more U.S. exports, and better access to the Chinese market for U.S. firms. That’s not nothing. It won’t be the historic trade deal Trump will surely claim it is, but markets will celebrate anyway.
Is it good for Washington to defer to markets? Tough call. The stock market represents the investor class, which is doing just fine, thank you, and isn’t the same as the real economy. But stocks are also a real-time sensor that can detect trouble before it shows up elsewhere. Investors have hated Trump’s tariffs from the start, and Trump finally seems to be listening. He can’t afford not to.
Confidential tip line: rickjnewman@yahoo.com. Click here to get Rick’s stories by email.
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Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman
