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.
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.
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.
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.
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.
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.
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.