Why a U.S./China Trade Deal May Be a Sell Signal

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Why a U.S./China Trade Deal May Be a Sell Signal

Many investors believe that a trade agreement between the United States and China would cause stock prices to rise as economic tensions between the two countries subside. Hondius Capital Management LP founder Shawn Matthews, on the other hand, believes an agreement would be a sell trigger, thereby terminating the extraordinary stock advance that started in late December. “Right now, it’s a risk-on mentality—you want to keep long riskier assets until you have a deal with China,” he told Bloomberg in a lengthy interview. “When that occurs, you should definitely seek to cut down.”

A number of equities that have fared well this year might jump if a robust US-China trade agreement is struck, but they may fall if an agreement is not reached or is weaker than predicted.

9 Stocks That May Swing Sharply

  • Skyworks Solutions Inc., SWKS
  • Micron Technology Inc., MU
  • MRVL stands for Marvell Technology Group Ltd.
  • Broadcom Inc., AVGO
  • Apple Inc., AAPL
  • Cheniere Energy Inc., LNG
  • Chesapeake Energy Corp., CHK
  • Deere & Co., DE
  • Monsanto Company, MON

What it Means for Investors

More than two months ago, talks between Chinese President Xi and US President Trump culminated in Trump agreeing to temporarily postpone plans to raise tariffs from 10% to 25% on $200 billion in Chinese goods. The two set a March 1 deadline for reaching an agreement in 90 days. Tariffs in the United States are projected to climb if no deal is reached.

Stocks in the United States have risen 16% from their December lows, thanks in part to market confidence that the two parties can achieve an agreement. However, Matthews believes that any agreement reached between the world’s two largest economies would be ‘watered down,’ implying that it will fall short of President Trump’s ambition of effecting fundamental structural changes in trade. “You want to fade the rally into the agreement—which is likely to be a watered-down settlement anyhow,” he added.

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According to Matthews, the bond market is also raising warning lights for equities as the deadline approaches. “If it was genuinely a risk-on world, and people believed it, and it was a long trade, you would see the 10-year begin to back up.” “That’s a strong indication that there’s some anxiety about what’s going on out there,” he told Bloomberg.

Skyworks Solutions, Micron Technology, Marvell Technology Group, Broadcom, and Apple, as well as Cheniere Energy, Chesapeake Energy, Deere & Co., and Monsanto, are anticipated to make significant changes – up or down – in response to a trade agreement.

Looking Ahead

Given the S&P 500’s enormous gains, many investors wonder how much higher it can go before coming back. Matthews, for one, believes that an agreement between the United States and China will be the catalyst. In the event of the anticipated sale, he advised Bloomberg to “buy the rumor, sell the actuality.”

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