Such A Deal

Such a deal.  Stocks rose yesterday in applause of the signing of the Phase One trade deal between the US and China. Investors are now free to focus on corporate earnings.




  • What details?  Ok, OK the Phase One trade deal between the US and China is FINALLY signed… now what? Of course the signing is a good thing but was it rally-worthy?  Let’s review the fresh details of the “Monster” deal, as dubbed by the President.  China agreed to purchase up to $200 billion in US products over the next two years.  Roughly $77 billion in 2020 and the balance in 2021.  The expenditures will be in manufactured goods, services, energy goods, and agricultural goods.  The largest slice of the pie goes to manufactured goods ($77.7 billion) and smallest goes to agricultural goods ($32 billion).  Wait, what?  Wasn’t this supposed to be all about the American farmers?  Well, spending is spending and $200 billion in sales is a win for the US economy.  What else is China giving up? Nothing tangible really.  They have agreed to stop putting pressure on US companies to share intellectual property.  For this, the US has agreed to forego the next round of promised tariffs and cut tariff levels on some existing tariffs. Tariffs would remain on $360 billion in Chinese goods. Those would be eventually worked out in a Phase Two deal, which is not happening for at least another ten months.  That is all… 86 pages worth… and nothing really unexpected.  Now that the deal is signed investors can put trade on the back burner for the moment and focus on earnings season. What will be interesting is what we hear in management discussions.  Trade has been one of the top cited reasons for slowing growth over the past year.  With that out of the way CEO’s will have to be creative in their narratives… if their companies miss their marks.
  • Premature incentivisation.  A little covered headline yesterday had Larry Kudlow telling CNBC that he is working on a new round of tax cuts. REALLY?  Nothing better than the promise of new tax cuts in an election year.  But let’s say, for argument sake, that the Administration pulls off another tax cut.  What would it mean for the US, or the market for that matter? A tax cut is a fiscal stimulus tool which puts more disposable dollars in the hands of consumers who, theoretically, spend those dollars and stimulate the economy.  But didn’t we just get a huge tax break in 2017?  How did that one work out?  Well, it was a boon for corporations who got the biggest benefit, spending much of it to buy back stock and bolster earnings.  The end result was that it had very little effect on the economy but had a very positive effect on the stock market.  In yesterday’s note, I spoke about fiscal stimulus and the US’s now $1+ trillion dollar deficit.  Another tax cut would only increase the deficit leaving law makers with less dry powder in the event of a real economic recession.  Don’t get me wrong, less taxes is a good thing, but not at the expense of the future health of the economy.  A “Tax Cuts 2.0”, as Kudlow put it, would certainly be good for the stock market… and voters.  A rise in stocks would certainly make some people happy, but considering that 10% of the US population owns 84% of all stocks held by households, one wonders if another tax cut is prudent at this time.




Stocks rallied yesterday in response to the President’s signing of the Phase One trade deal with China.  The S&P500 climbed by +0.19%, the Dow Jones Industrial Average rose by +0.31%, the Russell 2000 advanced by +0.40%, and the NASDAQ Composite Index traded up by +0.08%.  Bonds also rose and 10-year treasury yields fell by -3 basis points to 1.78%.




– Philadelphia Fed Business Outlook is expected to have jumped to 3.8 from 2.4.

– Retail Sales may have grown by +0.3% last month, slightly faster than +0.2% in November.

– The National Association of Homebuilders Housing Market Index is expected to be 74 compared to last months 76.

– This morning Bank of New York Mellon and Morgan Stanley beat and PPG missed Wall Street earnings estimates.  After the bell we will hear from CSX.


daily chartbook 2020-01-16


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