Many investors expect a U.S.-China trade deal to spark a rally in stock prices as economic tensions cool between the two nations. But Hondius Capital Management LP founder Shawn Matthews takes a very contrarian view: he argues an agreement would be a sell trigger ending the dramatic stock rally that began in late December. “Right now, it’s a risk-on mentality—you want to hold long riskier assets until you get a deal with China,” he said in extensive comments to Bloomberg. “When that happens you certainly want to be looking to scale back.”
A number of stocks that have performed well this year could surge with a strong U.S.-China trade deal but may falter if an agreement isn’t reached or ends up being weaker than expected.
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Talks between Chinese President Xi and U.S. President Trump more than two months ago resulted in Trump agreeing to momentarily halt plans to boost tariffs from 10% to 25% on $200 billion worth of Chinese imports. The two set a deadline to reach a deal in 90 days, by March 1. If no agreement is reached, U.S. tariffs are expected to rise.
U.S. stocks have surged 16% from their December lows in part from investor optimism that the two sides can reach an accord. But Matthews predicts a deal between the world’s two biggest economies is likely to be ‘watered down,’ indicating that it will fall short of President Trump's goal of achieving major structural changes in trade. “You want to fade the rally into the deal—and that deal is probably going to be a watered-down deal anyway,” he said.
Matthews says the bond market is also waving red flags for stocks as the deadline approaches. “If it was truly a risk-on world and people believed it and it was an extended trade, then you would see the 10-year start to back up. That’s a clear sign there’s some concern about what’s going on out there,” he said, per Bloomberg.
Technology stocks Skyworks Solutions, Micron Technology, Marvell Technology Group, Broadcom and Apple, as well as Cheniere Energy, Chesapeake Energy, Deere & Co., and Monsanto are likely to make big moves - up or down - on a trade deal.
Given that the S&P 500 has already staged massive gains, many investors wonder how much higher it can go before pulling back. Matthews, for his part, thinks a U.S.-China deal is the spark that does it. In the case of the expected deal, “buy the rumor, sell the fact,” he told Bloomberg.