This must be the first time in the history of internet search engines that typing in “cease-fire” yields a story on trade in the “Top Stories” section. On Saturday evening in Buenos Aries, President Donald Trump and Chinese President Xi Jinping agreed to a “cease-fire” or better put, a halt in new tariffs which will avoid escalating the US/China trade war. The Trump-Xi meeting result puts on hold, higher U.S. tariffs on Chinese goods that were due out this week. This should help end the selloff in stocks that were going to be directly affected by some of the new tariffs, such as the proposed cell phone tariff that had hurt Apple (AAPL) stock so badly. The cease-fire could be good news for Tesla (TSLA), Deere (DE) and U.S-listed Chinese stocks such as Alibaba (BABA). Also computer chipmakers like Qualcomm (QCOM) and NXP Semiconductors (NXPI), also could recover from recent selloffs since they would have been affected by the increase in tariffs as well as reduced sales of Apple products. The question now arises; is this enough to resume the bull market?
A Cease-Fire is Not a Peace Treaty
It’s important to note that this is good news, but temporary. The agreement gives China and the U.S. 90 days to make progress on a critical impasse, the theft of intellectual property by China. If no progress is made on this issue after 90 days, the U.S. will raise the existing tariffs on $200 billion of Chinese good that currently sits around 10%, to 25%. Beijing has agreed to restart purchases of U.S. farm goods right away after cutting off U.S. soybean buys, which is good news for farmers and companies like Deere & Company (DE). All of this is lost however if that 90-day window closes without significant progress no intellectual property theft and that is a big “if”. During the last earnings season, 69% of S&P 500 companies that reported forward guidance, reported negative forward guidance with many sighting trade as the reason. 90 days may turn around next earnings season, but it won’t boost capital spending and means the S&P500 (ES), Dow (YM) and Nasdaq (NQ) rallies have a potential to be short to medium-term, not long-term.