Despite widespread skepticism that the U.S. and China will reach a comprehensive trade agreement that ends months of conflict, Neil Dutta, the head of U.S. economics at Renaissance Macro Research, offers an upbeat outlook. He believes that optimism about a deal is growing, and that the net result is likely to be a further gain of about 11% for the S&P 500 Index (SPX).
“Since January 2018, we estimate that trade tensions have shaved a cumulative total of 300 points off the S&P 500. In other words, if not for all the negative trade news over the last 14 months, the S&P 500 would be about 11% higher," Dutta told MarketWatch.
How A Trade Deal Could Fire Up Stocks
- S&P 500 YTD Gain Through Feb. 25, 2019: +11.5%
- S&P 500 YTD Gain With Trade Deal: +23.5%
Sources: Yahoo Finance, MarketWatch
Significance For Investors
"Year-to-date, the S&P 500 has jumped 107 points [about 4%] on days of favorable trade news," as Dutta explained his methodology, in remarks published on Feb. 20. The S&P closed on Feb. 25, 2019 at 2,796.11, up 11.5%% YTD. If another 300 points were added, the gain would be 23.5%.
"I wouldn't necessarily use [these data] to make big sweeping calls, but the analysis captures general equity market movements based on macro factors," Dutta told MarketWatch. His analysis of market-related news headlines attempts to isolate the impacts of various categories on news on the major U.S. stock market indexes. These categories include, in addition to the progress of trade negotiations, such matters as U.S. economic data, actions and statements by the Federal Reserve, plus other news out of Washington.
Dutta says that his estimates are consistent with the market's reactions to the new U.S.-Mexico-Canada Agreement (USMCA) on trade which was negotiated by the Trump administration as a replacement for NAFTA, but which has yet to be ratified by the U.S. Senate. "That is why we saw a modest improvement last summer," when stocks rose on news of progress in these talks, he indicated.
In the U.S.-China trade war, the technology industry is a particularly significant battlefield, with the Trump administration determined to stop Chinese piracy of patented intellectual property developed by U.S. companies. Meanwhile, despite the Chinese government's push to make China a technological leader, just 30% of the semiconductors used as components by Chinese firms are produced domestically, Barron's reports.
Micron Technology Inc. (MU) is particularly vulnerable to the crossfire, per Barron's, since Chinese telecom equipment and consumer electronics company Huawei Technologies Co. Ltd. is heavily reliant on Micron-supplied chips. Huawei is facing the prospect of import bans in numerous countries, including the U.S., for violating sanctions on sales to Iran and North Korea, and for security concerns stemming from its support of espionage by the Chinese government.
On the other hand, if Huawei sees its Western markets closed, that should benefit rival providers of data networking equipment such as Cisco Systems Inc. (CSCO). "We have experienced price-focused competition from competitors in Asia, particularly in China," Cisco writes in their latest annual report.
A bearish view of the U.S.-China trade situation is offered by Citigroup. Their analysts assign a mere 5% probability to a bullish resolution of the standoff, per CNBC. By contrast, the assign 40% odds to their bear case, under which global stocks fall by up to 15%. Meanwhile, President Trump recently tweeted that he may delay his threatened imposition of new or increased tariffs on Chinese goods in March, based on "substantial progress" in the talks, according to another CNBC report.