How a U.S.-China Trade Deal Could Double S&P 500 Gains

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How a U.S.-China Trade Deal Could Double S&P 500 Gains

Despite widespread doubts that the United States and China will negotiate a comprehensive trade deal that would end months of fighting, Neil Dutta, the head of U.S. economics at Renaissance Macro Research, remains optimistic. He thinks that investor confidence about a merger is building, and that the S&P 500 Index will likely rise another 11%. (SPX).

“We estimate that trade tensions have taken 300 points off the S&P 500 since January 2018.” In other words, if it hadn’t been for all of the bad trade news over the previous 14 months, the S&P 500 would be up around 11%,” Dutta told MarketWatch.

How A Trade Deal Could Fire Up Stocks

  • YTD gain for the S&P 500 until February 25, 2019: +11.5%
  • S&P 500 YTD Gain With Trade: +23.5%

Sources: Yahoo Finance, MarketWatch

Significance For Investors

“Year to far, the S&P 500 has risen 107 points [nearly 4%] on days of good trade news,” noted Dutta in comments published on Feb. 20. The S&P 500 finished at 2,796.11 on February 25, 2019, up 11.5% year to date. The increase would be 23.5% if additional 300 points were added.

“I wouldn’t necessarily utilize [these statistics] to make broad sweeping judgments,” Dutta told MarketWatch, “but the methodology reflects basic equities market moves based on macro issues.” His examination of market-related news stories seeks to separate the effects of distinct kinds of news on the main US stock market indices. In addition to the status of trade discussions, these categories include US economic statistics, Federal Reserve actions and pronouncements, and other Washington-related news.

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According to Dutta, his predictions are consistent with market responses to the new USMCA trade agreement, which was negotiated by the Trump administration as a substitute for NAFTA but has yet to be passed by the US Senate. “That’s why we saw a little improvement last summer,” he said, as markets climbed on word of progress in these negotiations.

The technology sector is a particularly important battleground in the US-China trade war, with the Trump administration seeking to curb Chinese theft of copyrighted intellectual property generated by US firms. Meanwhile, despite the Chinese government’s desire to make China a technical leader, Barron’s notes that just 30% of the semiconductors used as components by Chinese enterprises are made locally.

According to Barron’s, Micron Technology Inc. (MU) is especially exposed to the crossfire since Chinese telecom equipment and consumer electronics major Huawei Technologies Co. Ltd. relies significantly on Micron-supplied processors. Huawei faces import prohibitions in a number of countries, including the United States, for breaking sanctions on sales to Iran and North Korea, as well as security concerns deriving from the Chinese government’s backing for espionage.

On the other side, if Huawei’s Western markets are restricted, competing data networking equipment suppliers such as Cisco Systems Inc. would profit (CSCO).”We have faced price-focused competition from Asian rivals, notably in China,” Cisco states in their most recent annual report.

Looking Ahead

Citigroup has a pessimistic picture of the US-China trade scenario. According to CNBC, their experts provide a 5% chance of a positive conclusion to the dispute. In contrast, they predict a 40% chance that global equities would decrease by up to 15%. Meanwhile, according to another CNBC source, President Trump recently stated that he may postpone his planned implementation of new or enhanced tariffs on Chinese imports in March due to “significant progress” in the discussions.

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