The Dow Jones Industrial Average Index is on the agenda in the United States and China

Text size

Bounce. The three major stock indexes closed with solid gains on Thursday, after China said it did not want to react immediately against the latest US tariff increases. China is also planning a meeting with US representatives in September.
General Dollar

stock (ticker: DG) and
Burlington Stores

BURL has climbed on surprisingly strong results. On the other hand,
Abercrombie & Fitch

stock (ANF) and
Best buy

stock (BBY) fell. Today After the bell, we …

• I wonder when the trade representatives of China and the United States will meet;
• look at the latest developments in the US Huawei Chinese Technology Survey;
• and check Wall Street's divergent views on the future of equities.

Emergency signs

Inventories rose on Thursday as trade problems between the United States and China showed new positive developments. the
Dow Jones Industrial Average
added 326.15 points, or 1.25%, to close at 26,362.25. the
S & P 500
earned 36.64 points, or 1.27%, to finish at 2924.58, and the
Nasdaq Composite
increased 116.51 points, or 1.48%, to close at 7973.39.

The Chinese Ministry of Commerce said on Thursday that it would not react to the latest tariff increase announced by the Trump administration last week, and that it was discussing the next round of trade talks across the way. to face with the United States scheduled for September. Treasury Secretary Steven Mnuchin also said in an interview Wednesday that US trade officials expected to meet with Chinese negotiators in Washington, but did not specify when.

Tensions between the two countries peaked last Friday when China threatened retaliatory measures against imports worth 75 billion US dollars. In response, President Donald Trump raised the existing tariff rate on Chinese products and asked US companies to stop operating in the country. But Trump softened his tone later. On Monday, he said the two countries had productive phone conversations over the weekend and China was eager to reach an agreement. According to the latest comments from both countries, further discussions seemed feasible, which is encouraging news for the market.

Nevertheless, the Wall Street Journal reported that US prosecutors were investigating new cases of alleged technology theft in order to broaden the criminal case against Chinese telecommunications giant Huawei Technologies. The Trump administration placed Huawei on a blacklist in May, banning the company from dealing with US companies for reasons of national security. The ban has since been delayed. However, should the new allegations be raised, tensions between the two countries could escalate further.

As the stock market was essentially tied to the range throughout August, Wall Street is divided as to its views on the future of equities.

The S & P 500 has already seen 18 withdrawals of at least 5% since the launch of the bull market in March 2009. Nevertheless, equities have increased more than 400% – including dividends – from the trough of 2009. "The corrections are always accompanied by bad news, but they are normal and the price of admission to the stock market," wrote Keith Lerner of SunTrust Investment Advisory in a note on Wednesday. "Although the short-term market situation is mixed, if the US avoids a recession, as we expect, it should be positive for long-term equities."

Barry Bannister of Stifel is more bearish. He turned to the 50-day moving average of the yield curve between 10-year and three-month Treasury bills as an indicator of recession, which has not given a false signal over the last 50 years. A reversal of the smoothed curve generally resulted in recessions of 10 to 11 months on average.

Since the reversal occurred on June 20 this year, it means that a recession could strike around May 2020, with the S & P 500 starting to dive in December 2019, wrote Bannister in a note from Thursday. If this is the case, history suggests that the S & P 500 index would fall by about 32% and the earnings per share of its companies would fall by 26%.

Even if the Fed lowers the target rate by 25 basis points at the September meeting, it would be too late to avoid the recession, according to Bannister: "We have long considered the Fed too tight, because it had begun the cycle of mid-2014 rate, the lowest level of -3% for fictitious investment funds (and not the first rate increase of December 2015). and full employment seems to be too archaic, wrote Bannister.

Write to Evie Liu at [email protected]