U.S. stocks bounced back this week after a nasty October. And while experts have cited a number of factors behind the resurgence in equities — including stocks being oversold and a strong economic backdrop — it would appear that one key narrative has helped to drive stocks toward a four-day rally: developments around the U.S.-China trade skirmish.
Read: Here’s the key question for U.S. investors about the trade skirmish with China
As the chart above highlights, upbeat tariff talks between Washington and Beijing have had a singular effect on stocks, highlighted most recently by a recent uptrend that has added more than 900 points to the Dow Jones Industrial Average since Monday’s ugly start to the week.
Also read: Trade-war tracker: Here are the new levies, imposed and threatened
Thus far, four notable developments have injected a fresh dollop of optimism on Wall Street:
A late Monday interview with Donald Trump and Fox News where the president said “he will make a great deal with China” President Donald Trump’s top economic adviser, Larry Kudlow, on Wednesday said “nothing is set in stone,” referencing a Bloomberg reported that suggested the administration would impose tariffs on all China imports On Thursday, Trump tweeted that he had a good conversation with China President Xi Jinping Bloomberg reported on Friday that Trump had drafted a U.S.-China trade pact ahead of a late-November summit CNBC reported that a trade deal was far off, refuting Bloomberg’s reportCheck out this tweet from CNBC’s Eamon Javers:
NEW: A senior administration official tells me that the report president Trump is ready to cut a trade deal with China is not true. “There is a long way to go” on negotiations, the official said.
— Eamon Javers (@EamonJavers) November 2, 2018
Other market participants were throwing more cold water on recent reports, questioning the likelihood the Trump administration was drafting an accord with China. Investors also have harbored doubts about the timing of upbeat reports on imminent trade pacts ahead of important midterm election on Nov. 6. Those elections are likely to shift the balance of power on Congress.
That is reflected in the following tweet from Joe Brusuelas, chief economist with RSM:
Rumors of a US-China trade truce look more like an attempt to talk up the market ahead of the election rather than real progress on the trade spat. I'm still telling client to prepare for a full 25% tariff on $517 billion of Chinese imports by mid-2019.
— Joseph Brusuelas (@joebrusuelas) November 2, 2018
Late Friday morning, the Dow had slipped into negative territory, giving up early gains. The S&P 500 index SPX, -0.75% and the Nasdaq Composite Index COMP, -1.08% were both trading in the red, with a decline in shares of Apple Inc. AAPL, -6.54% adding to the retreat.
Check out: 5 things about a U.S.-China trade war that might surprise investors
Chris Senyek, chief investment strategist at Wolfe Research, earlier this week highlighted the notion, echoed by many previously, that trade issues remain at the forefront of investors’ minds:
Trade has been a key driver of the global growth outlook in recent years. More specifically, competitive devaluations created stiff headwinds for trade and the world economy throughout 2015. We believe that the end of this destructive process was a key catalyst behind strong synchronized global growth in 2016-17. More recently, it appears that President Trump’s trade actions created a major drag on trade in the first half of this year, before activity levels started to recover as U.S. was making progress in renegotiating deals with Canada, Mexico, Europe, and South Korea.
He offers this chart to illustrate:
Trade issues have been at the center of Wall Street’s concerns because they have the potential to ripple into every other issue that has been besieging investors, if it escalates. That includes the growth outlook for U.S. corporations, an economic slowdown in China, the pace of rate hikes and the health of the U.S. economy and stock market, market participants have said.
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