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Are US Investors Over-Optimistic about a China Deal?

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US markets

Today, the key US indexes were trading in green territory for their fifth straight session. At 11:56 AM ET, the S&P 500 Index, NASDAQ Composite Index, and Dow Jones Industrial Average were up 0.5%, 1.0%, and 0.2% for the day, respectively. Reports about significant progress in US-China trade negotiations were one factor that boosted investors’ confidence and drove the US markets (QQQ)(DJI) up.

Let’s take a closer look.

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Negative impact of the US-China trade war

Over the last couple of quarters, the US trade war with China and European countries has taken a huge toll on investor sentiment. Over the last decade, many large US companies (SPY) have significantly raised their bets on Chinese economic growth, which has slowed down over the last couple of quarters. Also, an increase in the tariffs levied on US companies selling products and services in China has hurt these companies’ overall business and especially their profit margins.

The two largest US automakers, General Motors (GM) and Ford (F), have reported huge declines in sales and profitability from China over the last couple of quarters. US tech giant Apple (AAPL) had to cut its December 2018 quarter revenue outlook due to its declining iPhone sales, especially in China.

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Are US investors over-optimistic?

A US-China trade deal is likely to remove or at least reduce the tariffs US companies are paying to China. These lower tariffs are likely to help these companies improve their profitability and make them more competitive in the Chinese market. However, the slowing Chinese economy might not be resolved with a trade deal. Last month, J.P. Morgan Asset Management’s Alexander Treves called the Chinese economic slowdown “entirely natural as” it develops, CNBC reported.

Apart from China’s slowdown, rising concerns about a slowing US economy and the possibility of a recession may continue to haunt the US market in the near term. This is why investors should avoid basing their stock decisions solely on expectations of a US-China trade deal. Investors should also remember legendary investor Warren Buffett’s warnings about the companies’ valuations being too expensive lately.

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