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Trump’s Interim Trade Deal: Dow at $30,000?

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In a press interview on Friday, President Trump said he might consider an interim trade deal. He also said that the US government’s top priority is to get a complete trade deal and not individual pieces. In September, President Trump has been slightly lenient towards the trade talks. In August, he abruptly brought $300 billion worth of Chinese goods under tariffs. Previously, he considered doubling the tariff rates. The trade talks will resume in October.

Many experts, like Fed Chair Jerome Powell and other economists, suggested that trade war weakens the economy. Robert Shiller said that the trade war narrative could lead to a recession. The Nasdaq 100 Index fell 1% after the trade talks derailed last month. On August 13, the yield curve got inverted, which added fuel to the fire. The inversion increased the fears of a possible recession.

View on the market

On August 30, in another interview with CNN Business, Peter Navarro, President Trump’s trade adviser, said that the Dow Jones Industrial Average Index could surpass the $30,000 level. The increase might be possible if the USMCA (United States–Mexico–Canada Agreement) bill passes in September or early October. The interest rates would also need to be reduced by 100 basis points in 2019, according to Navarro. He said that the European Central Bank rate cut as well as Germany, Japan, and China’s fiscal stimulus are important for the market’s rise. However, Democrats might take more time to pass the bill. In another interview with CNBC, Navarro said that the USMCA bill might get passed by the end of 2019. 

On Thursday, President Trump criticized the Fed for higher interest rates in the US. He said that Europe’s negative interest rates are weakening the euro against the US dollar. A weaker euro could push the dollar higher, which could make US exports more expensive than their peers. Since assuming office in January 2017, the Trump administration has repeatedly vowed to boost US domestic production and exports. President Trump called for negative interest rates in the US to increase export competitiveness.

Despite President Trump’s views, the Fed will likely reduce interest rates by only 25 basis points during the meeting on September 18. Based on CME’s Fed Watch Tool, there’s an 88.8% chance for a 25 basis point reduction in the effective federal funds rate. There’s a zero percent chance for a 100 basis point reduction in the interest rates by the end of this year.

Trump could push the Dow to $30,000

In the absence of the USMCA bill and a 100 basis point cut in the interest rates, the US-China trade deal might be the only way to lift the Dow Jones Industrial Average Index over or near the $30,000 level—10.4% higher than the last closing level. An interim trade deal might also work. On Thursday, the equity index closed at $27,182.45. On July 16, the Dow Jones Industrial Average Index reached an all-time high of $27,398.68.

President Trump has softened his stance on China and Iran. Less geopolitical tension would be a positive development for the equity market. Boeing (BA) is the largest constituent of the Dow Jones Industrial Average Index. China is a very important market for Boeing. Lower oil prices would be a positive development for the aviation industry. If diplomatic talks start between the US and Iran, oil prices could decline—a positive development for Boeing’s order.

Energy stocks account for around 4.8% of the Dow Jones Industrial Average Index. Any fall in energy stocks due to possible lower oil prices could be offset by higher industrial and IT stocks. Industrial and IT stocks account for 39.3% of the index.

Apple (AAPL) is the largest constituent of this equity index among tech stocks. The trade war could inflate the company’s input costs. Apple’s phones are mainly made in China and shipped to the US. So, Boeing and Apple’s stock price movement will be important to watch.

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