Busy policy week closes with a flourish
Capping off a busy policy week, according to reports, White House and Chinese negotiators have reached an interim deal known as Phase 1 that appears to forestall a new U.S. tariff on $160 billion in imported Chinese consumer-related goods set for December 15 and rolls back some existing tariffs. The interim deal, if formally signed, would remove another key policy risk faced by investors as we conclude 2019 and look forward to 2020.
We view today’s news as a positive development. However, the portfolio implications are modest and we maintain our conviction in a bias toward a pro-growth portfolio orientation within our balanced view of the path forward for investors. Markets reacted modestly to the news as well, with U.S. and emerging market equities little changed on the day.
While impeachment continues to dominate headlines for U.S.-based investors, the conclusion of a Phase 1 deal between the world’s two largest economies is the key policy event of the week. In our view, capital market performance appears to hinge on a few key assumptions:
- Chinese/US trade tensions will prove temporary or have a diminished impact on the consumer and business climate.
- Central banks will remain in an accommodative or neutral policy stance.
- Economic growth will stabilize and improve in 2020.
- Impeachment proceedings will be newsworthy but peripheral to investor sentiment.
An interim or Phase 1 deal doesn’t address all of the issues between the U.S. and China. On the other hand, forestalling additional tariffs on consumer items and rolling back some existing tariffs is a positive development that further supports these assumptions – in particular, the positive impact on consumer and business climate and economic growth prospects for 2020.
Meanwhile, central banks including the U.S. Federal Reserve remain clearly in an accommodative or neutral policy stance as we end the year. Impeachment proceedings remain a wildcard, but in our view continue to remain peripheral to investors focused on corporate and economic fundamentals and monetary policy signals.
Phase 1 deal
According to reports, the White House has agreed to a Phase 1 deal with China that includes a rollback of some existing tariffs (from 15% to 7.5% on $120 billion of imports) and an agreement to delay a new tariff on consumer-related goods set for December 15. Important details about the deal remain unclear, but according to Chinese officials, the deal addresses a number of issues: intellectual property protection, forced technology transfers, food and agricultural products, finance, currency, growth in trade and dispute resolution.
Structural issues such as China’s policy of subsidizing domestic companies, which is seen as unfair competition by U.S. and other countries’ companies attempting to do business in China, are not included in this deal, and remain for subsequent negotiations (Phase 2) to sort out.
Some caution is warranted
While these events likely amount to a significant breakthrough, we believe some caution is warranted. Several months ago, a Phase 1 deal was announced, only for talks to stall. Trade-related headlines throughout the twists and turns of negotiations have been and remain a key source of market volatility.
Another caution is that longer-term, structural issues between the two largest economies in the world remain unresolved, suggesting that some level of tariffs will remain well into and perhaps through 2020 as negotiations continue on these difficult topics.
For investors, a Phase 1 deal that forestalls the December 15 tariffs would mitigate one of the last key policy risks remaining as 2019 draws to a close. Although it doesn’t fully bridge the gap between the U.S. and China, it is a positive development that supports several of the key investor assumptions behind capital market performance, namely the consumer and business climate and the outlook for a pickup in economic growth in 2020.
Therefore, heading into 2020, we continue to hold a balanced view of the path forward for investors with a bias toward a pro-growth portfolio orientation and believe today’s policy events support that view. As such, we think remaining diversified across asset classes and disciplined within your financial plan continues to be the best strategy for you. Please do not hesitate if we can answer any questions and we thank you for your trust.