3 Reasons The Stock Market Won't Make New Highs On The Phase I Trade Deal

The SPDR S&P 500 ETF Trust SPY has rallied 1.4% since President Donald Trump announced the U.S. and China have agreed to Phase I of a trade deal that takes Oct. 15 tariff hikes off the table for now.

While investors cheered the news that the trade war will not be escalating, some critics said Friday’s trade news isn’t enough to get the market to new highs.

Tom Essaye, founder of Sevens Report Research, said this week there are three reasons why the S&P 500 won’t be breaking out above its summer highs in the 3,027 range unless investors see better trade news:

The Phase I deal provided no relief from current trade war tariffs and it contained no provisions that would boost global growth from current levels. The December tariff increases are still in play, so the Phase I deal didn’t even eliminate market uncertainty over whether things could get worse from here.

The terms of the Phase I deal, including between $40 billion and $50 billion in agricultural purchases, intellectual property “protections” and forex “transparency,” are vague with few specifics as to methodology or timelines. These terms fail to eliminate the uncertainty weighing on the market.

The so-called Phase I trade deal is actually nothing more than a truce. There are no concrete terms in place, no means of holding parties accountable and no de-escalation of previously enacted U.S. and Chinese tariffs.

More Of The Same

The Phase I trade deal isn’t really different than the headlines coming out of previous rounds of trade negotiations between the U.S. and China, Essaye said. 

Investors are well aware that any progress could be undone in the blink of an eye with a single Trump tweet, he said. 

Given the continued uncertainty, Essaye said the S&P 500 will likely remain rangebound for now.

“I don’t think the S&P 500 can sustain Friday’s highs (so near 3,000) and there remain higher-than-normal chances we see a global and U.S. economic slowdown, so we need to remain vigilant to that possibility (and we will).” 

Despite the disappointment of the Phase I deal, Essay said it is a step in the right direction for investors. As long as U.S. economic data continues to be solid, he said there should be a floor under stock prices for now.

Benzinga’s Take

The rally over the past several days since the trade deal was announced has likely been a relief rally because trade tariffs were not raised this week, creating even more of a drag on the economy.

With no concrete details in place, the so-called Phase I trade deal is little more than a news headline at this point and provides little justification for higher stock prices.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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