This week’s PWA Index came in at a low expansion reading of 10.59. While consumer data is holding up okay, industrial data is waning, and while the financial stress index on balance is okay (+40), spreads are moving in the wrong direction.

China’s release of its white paper on trade with the U.S. clearly establishes that its leadership has drawn its own line in the sand. For one, although this is one I stated from the beginning would be there, they insist that all new tariffs be eliminated as part of any trade deal. Beyond tariffs, China is essentially telling the U.S. that it will not dictate how they’ll manage their economy going forward. Traders await Trump’s response with bated breath…

In the meantime, Trump, ahead of his UK trip this week, is telling Great Britain to play hardball with the EU, walk away if it doesn’t get exactly what it wants, and not to pay the $50 billion exit fee that was a condition of the EU agreement from the beginning. He’s also lavishing praise onto the populists who – through their aggressive Brexit campaigning – have essentially put the UK in this extremely precarious position.

Trump’s rogue (even Lighthizer opposed it!!) Mexico tariff threat on Friday, his latest 180 on China, his cancelling of India’s favored developing nation status (allowed tariff-free trade with us), his reported desire to slap tariffs onto Australia, and, not to mention, his hosting the Hungarian populist extremist Victor Orban in Washington week before last, strongly suggests that he’ll be doubling down on populism and protectionism as his 2020 election strategy.

While general conditions still dictate that we stay the course and weather whatever near-term volatility is to come, we are now nevertheless actively pursuing/testing various defensive strategies for client portfolios, should we need to go there in the near future.

As I’ve stated from the day Trump was elected, if he makes good on his populist and protectionist pledges (something he resisted until his second year in office), he’ll be presiding over the next recession and, consequently, the next bear market in stocks. At the moment it appears as though he’s willing to take that risk, as, again, he views this essentially anti-business ideology as his ticket to reelection. However, he’s also shown that the stock market has the ability to change his thinking.

The question being, will traders finally abandon their belief that – because a protracted trade war will be so damaging – the powers-that-be won’t go there (and/or that the Fed will [or even be able to] come to economy’s rescue), and, therefore, sell the market in grand fashion over the next few weeks, or will they continue buying every 1 to 3% dip ad infinitum? In the former – assuming it happens relatively soon – Trump gets the message and does a complete 180 on trade, and we see new, and sustainable, highs in stocks in 2019. In the latter, Trump remains emboldened by still-decent market gains during his tenure until he hammers the economy into submission; in which case we’ll be managing our way through the next bear market.

Wall Street is finally coming around to our way of thinking (from Bloomberg this morning):

“A recession could begin in as soon as nine months if President Donald Trump pushes to impose 25% tariffs on additional $300 billion of Chinese imports and China retaliates with its own countermeasures, according to Chetan Ahya, chief economist and global head of economics at Morgan Stanley.

While stocks have declined, investors are still overlooking the impact the trade war will have on the global macroeconomic outlook, Ahya wrote in a note on Sunday. Growth will suffer as costs increase, customer demand slows and companies reduce capital spending, he said.”

From Bloomberg this evening:

“JPMorgan Chase & Co. slashed its targets for U.S. Treasury yields, anticipating that the pressures of the trade war will hobble American economic growth and force the Federal Reserve to cut interest rates.

“The latest developments this week are likely to have lasting damaging effects on business confidence,” JPMorgan analysts led by Matthew Jozoff and Alex Roever in New York wrote in a note following President Donald Trump’s move to impose tariffs on Mexico. “Growth concerns are unlikely to dissipate over the near term, and could in fact build further.””

With regard to the Fed, here’s what I said in last Sunday’s commentary:

“Frankly, without a tariff-rolling-back trade deal with China, and a dispensing with all threats to incite the same with our other trading partners, I’m quite certain that the expansion (the global expansion) we presently enjoy will see its demise in the not too distant future. Along the way to the next recession, however, I’m equally certain that we’ll see, among potentially other stimulus measures, the Fed cut its benchmark interest rate; a practice that often leads to strong stock market rallies (hence, Powell potentially becomes hero). Whether or not such stimulus will ultimately stem waning conditions will depend of course on if/when a no-tariff deal is struck, and on whether or not it occurs before the tide has turned toward recession.”