foxex: Let's Make a Trade Deal

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Friday's Headlines

1. Markets rip on positive trade talks

Markets Close

Dow
24,706.35 +1.38%

S&P
2,670.71 +1.32%

Nasdaq
7,157.23 +1.03%

VIX
17.92 -0.78%

INV Anxiety Index
69 Neutral

US 10-Yr Yield
2.784 +1.27%

Year-to-Date

Dow
24,706.35 +7.13%

S&P
2,670.71 +7.44%

Nasdaq
7,157.23 +8.70%

Russell 2000
1,482.50 +10.81%

Crude Oil
54.8 +16.47%

US 10-Yr Yield
2.784 +1.75%

Markets Today

What a day and what a week for U.S. markets! News of actual momentum on the trade talks between the U.S. and China boosted stocks more than 300 points or 1.25% for the DJIA. The Nasdaq and the S&P 500 both climbed around 1 percent as the tide of good news lifted all boats. Multinational firms like Caterpillar (CAT) and Schlumburger (SLB) posted massive gains as the winds of a trade settlement added momentum. (Sorry for the sailing metaphors... I'm no sailor, but it's Friday!)

Friday picked up from Thursday when positive news on trade turned markets higher. Where we stand for the day and the year is up above.

One element of the trade talks that was new and inspiring for investors today was news from CNBC and Bloomberg that China has offered a 6-year increase to U.S imports to the tune of $1 trillion. Keep in mind that the U.S. has a $323 billion trade deficit with China today. An increase in U.S. imports would wipe out that deficit by 2024, according to Bloomberg. That trade deficit is one of the key reasons President Trump has picked this fight to begin with.

This chart, from Politifact, albeit from 2017, puts that gap into perspective.

Why it Matters

The U.S. has already added tariffs on $250 billion worth of Chinese imports and had threatened to add between 10-25% more on an additional $200 billion worth of goods. China responded in kind, and the sabres of a tariff war have been rattling for months. It has been one of the reasons for the market volatility and arguably the selloff in stocks in both markets since last summer. James has more on how the U.S. and Chinese stock markets have been celebrating the recent good news in our daily chart, below.

The positive momentum this week is slowly rendering the trade war less influential on the investing landscape. To be sure, there is a lot of time between now and the end of March when the U.S. and China reach the end of their self-imposed deadline to come to an agreement. A lot can happen. But the sentiment has improved dramatically, as have the returns in both stock markets.

Tesla's Job Cuts

Tesla announced it will be cutting 7 percent of its workforce earlier today. In a letter to employees, CEO Elon Musk said the company grew too fast (it added 30% to its headcount in 2018) and was not making enough cars - especially cheaper cars.

Shares of TSLA sank 13% on the news.

Here's an excerpt from Musk's letter to employees that sums up the cuts:

"...we unfortunately have no choice but to reduce full-time employee headcount by approximately 7% (we grew by 30% last year, which is more than we can support) and retain only the most critical temps and contractors. Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months. Higher volume and manufacturing design improvements are crucial for Tesla to achieve the economies of scale required to manufacture the standard range (220 mile), standard interior Model 3 at $35k and still be a viable company. There isn't any other way."

Why it Matters

Musk struggled as a CEO in 2018 with tactless comments, irresponsible tweets and peculiar behavior for someone running a publicly traded company. That said, he has created a remarkable automobile that has changed the game in the automotive industry. He has engineered a performance car and SUV at affordable price points that don't rely on fossil fuels. At the same time, he has struggled with the trappings of running a public company, namely running a business that has to continually deliver on quarterly results to keep investors happy. His desire to take Tesla private @$420/share was not him just being cute with cannabis code. His letter to employees today reveals the essence of the struggle to create mass market battery powered performance vehicles people can afford while keeping restless shareholders at bay.

The past year for Tesla has been especially volatile. Some of that is Musk's own doing. Some of that is investors' anxieties about whether this company is built to last and being run by the right people. This morning's announcement shows a more level-headed CEO at the wheel who is dealing with the growing pains of his company.

Here's Tesla over the past year, down 13%.

What's Next:

The Weekend!

We are closed Monday in celebration of Martin Luther King day in the U.S. We have a special edition of this newsletter for you Monday in honor of Dr. King, so stay tuned for that.

All markets in the U.S. are also closed, but most other global markets are open for trading. We are entering the teeth of earnings season next week and we will hear results from companies including IBM, Halliburton, Intel, regional banks and several airlines.

The partial U.S. government shutdown remains at a standstill. There has been no progress on that front. Hopefully, politicians in Washington will take the spirit of compromise into the weekend and end this madness.

Enjoy yours.

Caleb

Chart of the Day: Trade Developments Lift U.S. and China Markets

A Good Trade Deal Lifts All Boats

Positive news about U.S.-China trade negotiations seem rather plentiful of late. These developments have helped contribute to market surges on both sides of the Pacific. Ahead of a visit to Washington by China's lead trade negotiator later this month, the Wall Street Journal reported on Thursday that Treasury Secretary Mnuchin was open to lowering U.S. tariffs on Chinese products. Though this was later disavowed by a Treasury Dept. spokesperson, it provided a glimmer of hope that U.S.-China trade negotiations might ultimately be successful. This hope was boosted on Friday when, as mentioned above, Bloomberg News reported that China made an offer earlier this month to boost imports from the U.S. over a six-year period. The ultimate goal would be to reduce the U.S. trade deficit with China to zero. This would be contingent, however, upon President Trump being re-elected for a second term. Though these conciliatory remarks are currently little more than talk, they are encouraging signs that both sides may be eager enough to get a deal done.

From the market's perspective, a potential trade war has been on the forefront of concerns for both U.S. and Chinese investors lately. Any sign of progress in trade talks has the potential to boost equity markets. And that's exactly what's happened for the U.S. stock market and, to a lesser extent, the Chinese markets.

The performance comparison chart above shows both the S&P 500 (representing the U.S.) and the Shanghai Composite (representing China) over a one-year period. A few interesting observations to note about this chart. The Shanghai Composite has been trending down steadily for the past year, losing a full 26.80% over the year (as of Friday's market close). In contrast, the S&P 500 was trending up until October, after which some exceptionally jarring volatility began. The major damage, though, was done in the month of December, when the index plunged all the way up to December 24. In the New Year, the U.S. large-cap index made a major reversal, and is now down less than 6% for the year (as of Friday's market close). The performance discrepancy between the two indexes is clear. Although any success in U.S.-China trade negotiations is apt to help both countries' markets, the U.S. potentially has more to gain by a successful deal than China. If this is indeed the case, we could see the performance discrepancy between the two countries widen even further.