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Dow Teeters as Trade War Doubts Throw Stock Market into Disarray

Last Updated September 23, 2020 1:16 PM
Josiah Wilmoth
Last Updated September 23, 2020 1:16 PM
  • The Dow, S&P 500, and Nasdaq struggled to build on last week’s rally as investors digested conflicting trade war headlines.
  • Meanwhile, the stock market is now at its most expensive since last year’s violent correction.
  • One commentator worries that stocks are “priced for perfection” and could suffer a downturn if any of myriad factors fail to progress according to plan.

The Dow Jones teetered on Monday after Chinese state media fanned the flames of Wall Street’s raging trade war euphoria – only to see Beijing throw the entire trade deal narrative back into disarray.

Dow Fails to Build on Friday’s Mammoth Rally

Wall Street’s major indices traded cautiously on Monday morning, failing to capitalize on big gains in the futures session.

The Dow Jones Industrial Average bounced between gains and losses as it sought to hold above the 28,000 mark. At last check, the Dow had edged 0.95 points higher to remain virtually unchanged at 28,005.84.

dow jones industrial average chart
The Dow scrambled to hold above 28,000 following Monday’s opening bell. | Source: Yahoo Finance 

The S&P 500 wasn’t quite so lucky. The large-cap index slipped 3.74 points or 0.12% to 3,116.72.

The Nasdaq also endured narrow losses, declining 16.07 points or 0.19% to 8,524.81.

Dow Seesaws in Response to Sudden Shift in Trade War Outlook

The Dow, S&P 500, and Nasdaq all lurched sideways in response to concerns that Beijing is less confident than Wall Street about the prospects for a US-China trade deal.

According to CNBC Beijing Bureau Chief Eunice Yoon, Chinese officials privately harbor serious doubts that the two countries will sign a trade deal  before the 2020 US presidential election.

dow jones, trade war
Source: Twitter 

The last straw appears to have been Trump’s reluctance to roll back already-existent tariffs. Earlier this month, Beijing trumpeted an alleged agreement to begin unwinding tariffs in conjunction with the “phase one” trade deal, but Trump and other White House officials forcefully denied that they had any plans to roll back tariffs.

The pessimistic news came just one day after Chinese state media revealed that high-level negotiators had held a “constructive” phone call to discuss core issues  associated with the trade deal that President Trump and Xi Jinping originally planned to sign this week – back before the APEC summit was canceled.

The Stock Market’s Record Rally Has Zero Margin for Error

Wall Street’s trade war whiplash highlights the danger that investors have driven this rally way ahead of the stock market’s underlying fundamentals.

As Robert Burgess notes in a Bloomberg Opinion column, the S&P 500 is trading at 17.2 times forward earnings , making this the second most expensive stock market since the financial crisis. The only other time the S&P 500 was more expensive was late last year, immediately before stocks violently corrected heading into the new year.

Burgess writes,

Put another way, all the good news that equity investors are anticipating is already reflected in stock prices — and then some.

The phrase “priced for perfection” gets tossed around a lot by investors. This time, it feels appropriate given how much hope is priced into stock prices.

For all the optimism alternating out of Washington and Beijing, the two countries have yet to agree on the final text of a trade deal – any trade deal – following nearly a year of negotiations. And the clock is ticking on the next round of Trump administration tariff hikes, which are set to kick in on Dec. 15.

Nor do economic fundamentals support Wall Street’s sudden pivot toward optimism – or FOMO. Recent US data releases have quieted recession warnings, but they have not given investors any reason to believe that slowing growth will snap back into high gear.

Click here for a live Dow Jones Industrial Average chart.