Daily Capital

Weekly Market Digest: What Does the ‘Phase One’ Trade Deal Mean for the Economy?

We are now into the third week of the new decade and so far, so good it seems. The first few days of the year would have made you think otherwise with terms like WWIII being thrown around amongst heightened unrest between the U.S. and Iran, but it appears we can go back to our Baby Yoda memes for now. This week was particularly productive on the trade front with the signing of the phase-one trade deal between the U.S. and China as well as approval of the United States-Mexico-Canada Agreement (USMCA) which replaced the North American Free Trade Agreement (NAFTA). Earnings season kicked off with a bang led by banks, and Google became the fourth U.S. company following Apple, Amazon and Microsoft to hit the $1 trillion mark in market capitalization. U.S. stocks are at all time highs and we’ve made it to day 17 of our new year’s resolutions toward better personal and financial health habits! Strong momentum going into a three-day weekend with playoff football to say the least…

Weekly Returns

S&P 500: 3329.62 (+1.96%)
FTSE All-World ex-US (VEU): (+1.44%)
US 10 Year Treasury Yield: 1.84 (+0.01)
Gold: $1,556.35 (-0.36%)
EUR/USD: 1.1091 (-0.28%)

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Major Events

  • Monday – Tensions rose as protests in Iran heated up following admission by the Iranian government of accidently downing a Ukrainian airliner.
  • Tuesday – J.P. Morgan posted record earnings citing a pickup in fixed income trading.
  • Wednesday – The U.S. and China signed a historic phase one trade deal.
  • Thursday – Seasonally adjusted Retail Sales showed solid gains for December, up .3% from the prior month.
  • Thursday – The Senate approved USMCA a reformed version of NAFTA.
  • Friday – China’s economy grew at a rate of 6% for the fourth quarter despite concerns over a global slowdown.

Our Take

Most of you are probably tired of hearing about the trade war, and rightly so, it’s been exhausting. But now that we can finally take a break for the moment; lets recap what was accomplished by this week’s historic phase one deal signing and what was not.

What is it?
This is the first part of a broader deal that hits on some of the less complex issues. It shows that the two sides can work together and provides some political leverage for both sides claiming small victories. It is extremely unlikely we will see any further resolution in the form of a phase two deal before the election later this year.

What key concessions are included?

  1. China agreed to spend $200 billion on U.S. goods to help close the gap on trade imbalance over the next two years.
  2. China pledged to open up its markets to U.S. companies.
  3. It requires Beijing to avoid currency manipulation to gain trade advantages.
  4. It calls for a greater crackdown on forced technology transfers and intellectual property theft by China from U.S. companies.
  5. The U.S. agreed to remove certain tariffs and not impose new ones by cutting duties on $120 billion in goods to 7.5%, but leaving in place $250 billion in tariffs on other goods.

What key concessions are missing?
The key things the deal does not address are any sort of reform to mass government subsidies to domestic companies that give China an unfair advantage in the global economy. It also does not touch on the issue of longtime presumed Chinese state-backed hacking attacks of U.S. companies and government institutions. The other concern that has always been an issue with any sort of agreement with China is enforcement. Though there were some attempts made to hold China accountable within the language of the agreement, it is yet to be seen if they will follow through and how effective it will be.

What does this mean for the U.S. Economy?
Although the deal still leaves plenty to be desired, the near-term resolution should lift some of the uncertainty causing businesses to withhold capital investment decisions. Uncertainty remains, but for now there is some reprieve which has been signaled by the recent strength in equity markets.

For more information, see the entire phase one agreement here.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Lacey Cobb serves as the Director of Advice Solutions at Personal Capital. She has 10 years of financial industry experience, with a background in portfolio management, trading, research, investment analysis, and financial planning. Prior to Personal Capital, she was the Head of Trading and Research at Polaris Greystone Financial Group, where she managed the portfolio management team and served on the investment committee. She started there as a financial planner and helped grow AUM from $250 million to $1.5 billion. Before that, she worked for State Street as a fund accountant. Lacey graduated from the University of California, Davis, and holds both the Chartered Financial Analyst® designation and Certified Financial Planner™ designation.

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