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The first half of May has been a rude awakening for investors as the U.S./China trade conflict has unexpectedly escalated. This escalation started with a weekend tweet by President Trump, followed by increased tariffs on Chinese imports that range from 10% to 25%. The response from China – tariffs on $60B of U.S. goods – was announced shortly thereafter. Early negotiations were peppered with inflammatory rhetoric, but many on Wall Street believed the tone on both sides had been tempered. A trade agreement was widely anticipated, so capital markets quickly turned lower on the news of this escalation.

The official signing of a trade deal between the U.S. and China appears elusive at the moment, as do the details of any agreement. However, a deal-in-the-making is still a distinct possibility. The U.S. and China are the two largest economies in the world and each other’s most significant trading partner. While China is the largest foreign holder of U.S. government bonds, the United States is the largest consumer of Chinese exports. In short, the stakes are high, and both sides have an incentive to strike a deal.

President Trump has long said that he seeks to narrow the U.S. trade deficit with China. It’s been widely reported that a deal would involve China buying more U.S. goods; however, that won’t necessarily change overall demand for U.S. made products. If China purchases more exports from the U.S., it would likely mean they would make fewer purchases from Canada and Eurozone countries – economies already experiencing hardship. Observing recent trade trends led us to several interesting charts to share with you.

Looking at the U.S. trade balance with China in the chart below, it’s apparent that our trade deficit has continued to widen since 2016, despite the Trump administration’s objective of reducing this deficit. Trade tensions have likely contributed to our reduced imports from China, which are down 14% year-over-year. Additionally, U.S. exports to China have fallen roughly 19% year-over-year.

We also believe that reduced trade has contributed to slowing global economic growth. Despite a healthy domestic economy, Ned Davis Research’s Global Recession Probability Model remains elevated at over 90%, as shown in the next chart.

We see some positive news in all this as the recent market volatility quickly relieved the excess optimism that has persisted for much of 2019. NDR’s Daily Trading Sentiment Chart below demonstrates the shift.

We continue to remain slightly underweight in equities in our portfolios while we wait for fundamental improvement in the global economy, U.S. corporate earnings and/or a meaningful trade resolution between the U.S. and China.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.