In a rough day for markets the Dow lost nearly 800 points and all three major indices featured greater than 3% losses. This major market sell-off was the result of uncertainty regarding the trade agreement between President Trump and Chinese President Xi as well as an inversion in the yield curve. Another small contributing factor is that markets will be closed tomorrow in order to recognize a day of mourning for the late President George H.W. Bush. Since the market is closed tomorrow there was greater volatility today in order to compensate for ensuing off-day.
Much of today’s downturn can be blamed on an uncertainty regarding how successful the Trump-Xi meetings at the G20 summit this past weekend were. Trump initially sounded very confident and optimistic regarding the meetings but as we have learned President Trump tends to overstate his success. It seems that President Trump and President Xi have very different perceptions of what happened at the G20 summit.
Going into the G20 summit there were essentially three options of what could result from the meetings. The first and most positive option would have been that we come to a new trade deal and tariffs are eradicated. The second option was that we pause the increase in tariffs and buy time in order to come to terms with China. And the final option was that nothing happens and we continue with our original plan to increase tariffs from 10% to 25% on $200 billion worth of Chinese goods. What ended up happening was the middle option. If this really is what happened at these meanings than it is not a terrific result nor is it a bad result. It simply buys the United States and China time to reach an agreement without continuing to increase the prospects of a growth slowdown. The issue is that investors are wary of how strong an agreement this 90-day peace period is. Many are skeptical that a binding deal was not agreed upon by both parties.
The sentiment of investors today is that trade tensions are still as strong as ever and that no real progress was made at the G20 summit. Many just assume that President Trump will try to say positive things in order to benefit the stock market as oftentimes it seems that he uses the markets as his primary gauge of presidential success.
This negative sentiment regarding the current trade tensions with China has led to an inversion in the yield curve between the 2-year and 5-year treasury notes. This inversion is an indicator that a potential recession is in sight.
The combination of a fear of persisting trade tensions and an inverted yield curve scared investors. I believe today’s sell-off was an overreaction to the negative news that the G20 summit may not have been as productive as President Trump led us to believe. With the current volatility in markets there have been extreme overreactions to both positive and negative news. In the long run, I feel that a deal will be met as President Trump has proven to us repeatedly that he uses the stock market as a major gauge of his success. He will not let trade tensions with China be the catalyst for a recession and he will ensure that a deal be met by the 90-day peace period’s end on March 1st. As for now, it may be wise to put money in safer assets with lower growth multiples. During times of high volatility, it is beneficial to invest in financially strong companies with low growth multiples as the tech and retail stocks are the equities that could be most drastically effected by an increase in volatility.