Stocks Reverse Course after Rallying on Tentative Trade Agreement

By American Century Investment Management - December 4, 2018

After rising sharply on news of a potential truce in the U.S.-China trade war, the U.S. stock market gave it all back—and then some—a day later.

U.S. stocks declined significantly as investors grew concerned about whether the recent "truce" would hold between the U.S. and China in their ongoing trade conflicts. Both the Dow Jones Industrial Average and the broader Standard & Poor's 500® Index plummeted more than 3%, just one day after they had rallied on what was initially viewed as a tentative trade agreement during the G20 summit held Nov. 30-Dec. 1, 2018, in Buenos Aires, Argentina.

Additionally, concerns that a key bond market indicator signals an economic slowdown pressured U.S. markets. The U.S. yield curve flattened (the spread between short- and long-term interest rates narrowed), generally considered a bearish signal for the economy ahead.

Industrials, such as Boeing and Caterpillar, led the decline on concerns about the potential for weaker economic activity in the U.S. Information technology stocks, including Apple and many of the companies that supply components for its smartphones, also dropped. Uncertainty around the details of the tentative U.S.-China deal weighed particularly heavy on tech names.

Stocks Saw Short-Term Rally after Tentative Deal in G20 Talks

President Donald Trump and President Xi Jinping reportedly described the G20 summit as a "highly successful meeting." President Trump agreed to leave tariffs on $200 billion worth of Chinese goods at 10%, rather than increase them to 25% on Jan. 1, 2019, as originally planned. In turn, President Xi pledged to immediately resume purchases of U.S. agricultural goods, including soybeans, which were hit particularly hard by China's retaliatory tariffs. China also agreed to buy an unspecified amount of energy, industrial and other products from the U.S.

The two sides agreed to continue talks to resolve contentious policies at the heart of the trade conflict. Such policies include intellectual property protection, state-sanctioned cyber intrusion and forced technology transfer. Trump and Xi said they would attempt to resolve these issues within 90 days, but if no agreements are reached within that period, U.S. tariffs will increase to 25%.

Despite Uncertainty, Truce Could Benefit Emerging Markets

While considerable uncertainty remains around resolution of these trade conflicts, the fact that the U.S. and China reached a tentative agreement could benefit recently troubled emerging markets (EM). We have long believed that EM fundamentals are strong in terms of relative valuations, earnings growth and underinvestment in the asset class, but that a catalyst would be needed to spark another EM equities rally. The current trade war ceasefire could represent that catalyst.

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