It seems that China has been in the headlines for all the wrong reasons lately. First, there were concerns over China’s rapid and aggressive militarization of the South China Sea, an effort that could threaten U.S. allies and their interests (not to worry, the U.S. has an ace up its sleeve). Next, trade relations soured between the U.S. and China as Presidents Trump and Xi exchanged vollies of tariffs back and forth, leading to significant pullbacks in the market.
But most recently, the alarming headlines concerning China have come from Mt. Everest, in the disputed Chinese territory of Tibet. Over-commercialization of guided treks up the world’s tallest mountain have lead to log-jams at the peak, with deadly results.
You see, humans were not designed to climb that high. I’ll spare you the grisly details of what happens to a person above the “Death Zone” (approximately 26,247 ft.), but basically if you spend too long above it, the air becomes too thin to survive. With too many mountaineers attempting to reach the top in a small window of time, the delays have driven the death toll up to 11 climbers in 2019.
Just as climbers face life-threatening dangers ascending natural wonders of the world, investors must account for the threats accompanying our incredibly high markets, especially looking out for the possibility of perilous drops like the China trade deal.
So while solving the issue of traffic on Everest could take years of reforms, this weekend does have the chance to at least start resolving a geopolitical jam troubling China headlines…
As you’re reading this on Saturday, leaders from the U.S. and China will have already met at the G20 summit in Osaka, Japan. Pundits will have weighed in, but the market will not have rendered its verdict here in the U.S. until the futures markets open in Chicago at 5 p.m. on Sunday (6 pm EDT).
As long as nobody starts shooting at stuff in the Middle East, the headlines (and tweets) coming out of Osaka will dominate the narrative of the markets until Monday.
As I mentioned in our market update video on Friday, traders and investors seem to have an expectation that no real “deal” will be done. So that makes a “Goldilocks and the Three Bears” scenario for the weekend…
- Papa Bear Scenario: “Goldilocks found his bed too hard”. This happens if one or both sides takes a hard-line and calls off talks, ends them abruptly, or says they’re ready to fight for the long haul. Markets will dive south – how far of a drop will depend on how hard a line is taken. I think this is the least likely of the three scenarios.
- Mama Bear Scenario: “Goldilocks found her bed too soft”. If some meaningful movement is made with IP protection or a firm timeline for removing or reducing tariffs, we will have gotten more than most expected. Markets will open up very strongly for overnight trading Sunday. Again the size of the move up will be aligned with how big the positive surprise is.
- Baby Bear Scenario: “Goldilocks found his bed ‘just right'”. Here we get some form of positive sentiment and statements from both sides, but no clear new concessions or path forward. This is largely what the market expects. If the statements are more positive with real timelines attached, markets move up. More bland than expected, we move down modestly. Any move toward a resolution will be seen as at least a mild positive by the markets.
As we await the market’s judgment on what happens at the G20, let’s take a look at a bit of recent market history to see what we might expect next. With the market within spittin’ distance of a new all-time high, we see that the S&P 500 made a new all-time highs a week ago (two if you’re looking at intra-day highs). We should recognize that these are Everest-size levels, but ultimately we need to break up the traffic jam coming to the S&P. Here’s the tally for new all-time highs per year from LPL Financial. That’s now 1,140 new ones since WWII, if you’re counting:
You can see that the market took years to recover from the dot.com bubble bursting in 2000, and almost six years after the real estate/debt bubble of 2007-2009. Since then, we’ve had multiple new highs each year.
But as you can see from the chart below, things have been a bit different in the last 10 months.
Much like those intrepid climbers on Mt. Everest, the problem isn’t with hitting all-time highs, it’s been holding those all-time highs:
The outcome of the G20 talks and the subsequent deal negotiations on the U.S./China trade relations will go a long way in telling whether the market can finally hold onto a set of new all-time highs and push upward from there, or if it once agains loses its grip in the thin air at the top of the chart.
Either way, I’ll be be here to help you navigate the next market phase. Traditionally, the pace of trading and market movement is slower during the summer – but the volatility and uncertainty of the trade talks, combined with the heightened tensions in the Middle East, make the probabilities for many atypically spirited price runs this summer much higher. Stay tuned as we ride the volatility together.
Great Trading and God bless you,