One thing you learn early on as a markets reporter is to always be cautious about assigning causality to price moves in markets. And when you do, hedge. Even in the most ostensibly straightforward cause-and-effect events, there is always another explanation possible. Yesterday, stocks were jolted out of their bullish stupor and bonds and gold came alive as President Trump displayed an uncharacteristic degree of ambivalence to the urgency of a trade deal with China.
The news came out, the lines on the chart moved, and all the action seemingly matched up nicely to the narratives published by news outlets. Right? Probably.
That doesn't mean it's not worth questioning whether these trade developments really deserve the magnitude of swings to which they're being attributed. The possibility of the Dec. 15 tariffs on consumer goods going to action is likely what added particular gravity to yesterday’s moves, but the ping-pong of tariff melodrama has in general become notorious in its frivolity, seemingly changing from one day to the next without a whole lot of rhyme or reason.
Given the sluggishness of both U.S. and China’s economies, it stands to reason neither party is eager to see the last batch of tariffs go on – but who knows. What may be more important is considering whether the existing menu of tariffs is even worth the emphasis they’ve been given. Evidence is mounting that the manufacturing slowdown of the last year looks similar to the mid-cycle pullback the global economy experienced in 2015 to 2016, as PMI numbers show signs of turning upward the past two months.
That would suggest the economy may not be as dependent on this trade situation as the number of headlines suggest. What it also means is that – in the absence of Dec. 15 tariffs – maybe it’s time for investors to find something else to focus on, because the longer stocks rally on the expectation of tariffs being rolled back, the bigger the economic response will need to be to justify their price.
And if the tariffs are not obviously the direct cause for the slowness to begin with, their impulse for growth may not be what equity investors need for earnings growth. Yet, with all that said, it doesn’t mean stocks aren’t right to come under pressure. They’re the most expensive since September on a trailing P/E basis, and since January 2018 on a forward basis. Maybe they’re just skating on thin ice, and no attribution is needed at all.
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