In our September 10 message we said to “expect a rough patch”. Here was our reasoning:

We should absolutely expect a rough patch, in the near-term, exacerbated by the latest on trade: Friday, the President said he’s itching to go with tariffs on $260 billion of Chinese imports above the $200 billion he promised to implement any day now.

Here’s a chart of the S&P 500 (white) and the NYSE Composite (a better market proxy, in orange) since our 9/10 post:





Well, there was a little rough patch (for the S&P) from 9/14 to 9/17, but of course that’s not what we were thinking.


This from yesterday’s Fortune Magazine daily brief is what we’re talking about:

The bottom line: We’re about to go from a little pushing and shoving, in which tariffs affect only $50 billion of goods on each side, to an all-out slugfest in which each economy tries to hit the other with everything they’ve got. Where does it stop? Tariffs on iPhones? A permanent shift in Chinese agricultural imports? Chinese consumer boycotts on US products? The stakes are huge, and things are about to get very ugly very fast.

What’s especially scary about this confrontation is that Monday feels like a crossing of the Rubicon. Once this new round of tariffs has been imposed, it’s almost impossible to envision how either side will step back.

In the US, China-bashing is political catnip—one of the few things on which leaders from both parties agree. As Trump girds for mid-term elections in November, he knows that taking a hard line on trade with China has little downside. True, it may risk undermining his support among US-based Fortune 500 businesses. But who cares? China-bashing is guaranteed to play well with ordinary voters as well as his conservative base.

Similarly, China’s president Xi Jinping can’t afford to be perceived as surrendering to US pressure. China’s state media has, for the last several weeks, pushed the idea that there’s no point in trying to negotiate with the US on trade because Trump’s tariffs are part of a broader “containment” strategy. Even private sector executives like Alibaba founder Jack Ma now feel compelled to parrot the party line that Trump’s tariffs aren’t about establishing a level playing field on trade but part of a wider plot to thwart China’s rise as a global power.

No wonder, then, that Beijing has scuttled plans to send Vice Premier Liu He to Washington next week for trade negotiations with US Treasury Secretary Steven Mnuchin. Xi seems to be betting that he’ll be in a stronger bargaining position in late November after Trump and the Republican Party have taken a drubbing in mid-term elections. That’s a dangerous gambit. Relations between the world’s two largest economies may yet get worse.

While some would try, I don’t believe that there’s a legitimate argument against the points made above, save for one, possibly two. The questionable point(s) would be found in paragraph two, and possibly paragraph three:


Again, paragraph two:

“What’s especially scary about this confrontation is that Monday feels like a crossing of the Rubicon. Once this new round of tariffs has been imposed, it’s almost impossible to envision how either side will step back.”

I actually can envision how a stepping back occurs: We’ve expressed from the get-go our view that should the market collapse (a strong selloff, initially) under the weight of trade disputes, smarts will intervene and a truce will be had in relatively short order.


In fact, the President himself essentially made the case in a July interview with CNBC. 


He said:

“This is the time. You know the expression ‘we’re playing with the bank’s money’, we’re up almost 40%.”

“I would have a higher stock market right now, it’s up almost 40% as you know since the election, it could be 80% if I didn’t want to do this.”

I.e., clearly, the president feels emboldened by the bull market! Oh, and being that the market is what we do, I can’t help but offer up a correction: From election night to the day of that interview, the S&P 500 was up 31.45% and the New York Stock Exchange Composite Index was up 21.81%. 


Paragraph three:

“In the US, China-bashing is political catnip—one of the few things on which leaders from both parties agree. As Trump girds for mid-term elections in November, he knows that taking a hard line on trade with China has little downside. True, it may risk undermining his support among US-based Fortune 500 businesses. But who cares? China-bashing is guaranteed to play well with ordinary voters as well as his conservative base.”

I agree, as I’ve complained ad nauseam over the years, protectionism is where both parties (used to be more-so on the left) party. However — save for the most politically-captured individuals (and, I know, that’s no small number of people) — folks generally vote their pocketbooks. If indeed the trade war hits the markets hard heading into mid-terms — and calls the economic expansion into question — I suspect that there will be polling that shows there’s more than a little risk of “downside” among “ordinary voters”.


I.e., in a significant selloff scenario where the catalyst is the “trade war”, the political risk alone makes it likely that negotiations will ensue (although, per the latest from China [last paragraph in the excerpt above], they may have to wait till after the mid-terms) and common ground will be found.


In the meantime, and I repeat, expect a rough patch!  


For our purposes there’s no strong defensive measures to be taken (as even the healthiest bull markets are forever peppered by rough patches), unless, or until — as I explained in last week’s video — general conditions begin to rollover. 


This week’s PWA [Macro] Index scored a historically comfortable 44.05.


Have a nice week!
Marty