In addition, there were also stories suggesting that trade negotiations with China were progressing to the point that the U.S. might defer extending tariffs on March 1.
Details of the agreement to fund all the remaining government agencies still aren’t available but it appears that it includes some funding for border wall security. With all the hyperbole about building a wall along a large part of the Mexican border, to date all that has happened is that part of the existing barrier has been rebuilt or upgraded. The agreement appears to provide funding to extend the wall for about a cumulative total of a bit more than 50 miles at specified locations. Sounds like a reasonable compromise. Of course, the President has to sign on and has expressed doubts. Never one to let anyone else have the last word, he threatens to try and tweak the bill but the obvious danger is that reopening it might mean it can’t be resolved before a weekend deadline. While several of his conservative media acolytes like Sean Hannity and Ann Coulter disparaged the agreement, this time around, the damage to Trump himself, should he choose to walk away from an agreement reached by both Republican and Democratic leadership, is probably too severe for him to attempt such action. In Florida, signs are already up to expect road closures starting Friday for the President’s four-day holiday retreat. He won’t be coming until a deal is signed.
Away from the politics, it will be worth noting how expensive the deal might become after 535 members of Congress try to add their own personal goodies. These bills have a way of inflating the deficit, one that doesn’t need any additional inflating. As always, the devil is always in the details.
As for the China trade/tariff talks, once again the short term economic pain to both countries created by extended tariffs is something each is incented to avoid. While tough talk and posturing could take negotiations down to the last minute, the Trump administration is starting to see that unilateral actions don’t always work. Backing out of the Trans Pacific Partnership almost immediately upon taking office has led to a series of bilateral and sectional trade pacts that (1) leave the U.S. out, and (2) enhance China’s presence along the Pacific rim. So far, the only agreement we have reached is with South Korea. Even the revised NAFTA agreement is in some political jeopardy.
It is obvious why stocks would rise if two apparent storm clouds, a possible new government shutdown and increased tariffs on Chinese imports, start to disappear. But be careful buying into strength created by these two events. Our economy is still growing at an ever slower rate. That will be apparent when first quarter GDP is reported this spring. Economies in Europe are at the edge of recession and also show further deceleration ahead. China is also in a growth slowdown. Resolving the U.S. government funding issues and deferring additional tariffs on Chinese imports, isn’t going to change any of those dynamics. Granted they may not get worse but stocks today are back to fair value if not a little bit ahead. Instinct is to buy on good news but the real news that should shape the stock market in the months ahead is any sign of economic stabilization or re-acceleration. Right now, there are virtually no such signs either here or abroad. Without any hint that the deceleration process is ending, it would be hard to sustain the January-February gains.
Just because stocks are near fair value doesn’t mean they can’t become overvalued again as they were in early 2018 and again in late summer. But as we learned last February and October, getting out at the top requires exquisite timing. Of course, every stock must be judged on its own. With that said, few are cheap today. Those that are down are down for a reason. Many now are starting to trade above historic valuation ranges again. Not all, but some. Pay attention and don’t be afraid to take any further good news on the trade front to lighten up on stocks that might become extended on further rallies.
Today, Peter Gabriel is 68. Jerry Springer turns 74.
James M. Meyer, CFA 610-260-2220
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