I noted previously that the stock market was ill-prepared for a protracted trade disputes between China and the U.S. Investors completely unfounded hopes that a deal would be reached, or . China and the U.S. , after a cooling off period, would resume talks and each would make concessions necessary to consummate an agreement.
These expectations, long-held by investors, analysts and financial journalists alike, were confounded when President Trump imposed a 25% tariff on specified Chinese goods. The market, unprepared for the bad news, started to gyrate and many fear the volatility seen during the last quarter or 2018 may return and ultimately, linger over the market, until uncertainty related to a trade agreement is extinguished.
The market has see-sawed over the past three days. The CBOE Volatility “fear gauge,” the VIX, jumped 30% on Monday, making it the latest one day advance since October. The Dow Jones Industrial Average, dropped 600 points on Monday, in reaction to President Trump’s to increase tariffs on $200 billion of Chinese goods. Rounding out the bad news, the S&P 500 is off to its worst start for May since 1970.
Some journalist and fund managers continue to entertain the view that China and the U.S. must reach an accord and each party will ultimately, revise their previous positions, compromise leading to mutually acceptable agreement. Leland Miller, CEO of China Beige Book International, represents the sentiment of many on Wall Street, when he says, “I still think we’ll get a deal.” Miller adds however, that, “it will take some time for both sides to cool off.”
I like to characterize this expectation as the “hope springs eternal” prediction, that is keeping the market from dropping precipitously.as I noted previously, far too many analysts have failed to appreciate that there are substantiative national security issues that supersede any existing trade arrangements between the two superpowers. As Trump has now signaled by the 25% hike in tariffs, these core positions for the U.S. are non-negotiable.
Once the market fully absorbs this reality, it is going to respond adversely with increasing tergiversations, breaking an almost nine month placid investment environment. For those who have ignored, overlooked, or dismissed outright, the dramatic and long-standing economic imbalances in terms of benefits derived from our existing commercial relationship with China, will be in for a rude awakening.