Euphoria in the market

 After the announcement of the pause in the trade situation, the markets went all euphoric. The fear/greed index right now is extreme greed.  This index is one of my favorites as it guides me when to buy/sell stocks. Even if you're a long-term holder, it might still be useful. The market is also overbought. I'd say this is the time to be cautious. Remember this fact, based on years of historical data: no market goes up forever, especially when it goes up so high so quickly. You can look at every chart you can think of, when a stock/index goes up so much so fast, eventually it will come down. The converse also happens, the bigger the crash, the higher the eventual rebound, which is what we're witnessing right now. I'm not saying this is the time to sell everything, but personally I'd take some profits and start to do some hedging. Any bad news can cause the rally to stop or even drop. My belief is that even though the liberation day losses are erased, it may not go back to all-time high. There is still some risk of stagflation/stagnancy even though there might not be an outright recession.  

Difference from 2018-2020 Trade Situation

It is likely the 30% on China and 10% universal on major trading partners will be the 'best-case' baseline going forward. Not to mention there are also 25% on auto, steel, etc. Possibly more incoming. Also we have high interest rate, and a record high of consumer credit card debt. Note that 70% of U.S. economy is based on consumption. A weakness in consumer spending spells trouble, and at the beginning there is already some warnings from consumer staple companies/retailers regarding this.  No doubt some of these may be cushioned by other areas such as tax cuts, investment growth, AI capex, etc. But it remains to be seen how it will play out over the next 3-6 months. 

A toothless tiger, nobody will take this trade war seriously

My analysis for the past few posts are thrown out the window. The announcement to mutually reduce tariffs by over 100% shows their weakness. Originally it was thought they would at least put up a fight, but who knows their pain threshold is so low? They have shown themselves to be a toothless tiger, big roar but no bite. Totally just caved in front of China. China didn't even have to make any concessions or uphold previous deal from 2018-2019. If I were China, I wouldn't take it seriously and will even take a tougher stance. Expect the same from other trading partners, I wouldn't be surprised if most of them starts to play hardball. This on-off nature is exhausting to investors/traders/businesses. 30% won't stop them from importing China goods, so in the end they will end up on the losing side for paying the additional taxes. A totally meaningless situation that does more harm to themselves. Again expect inflation to creep up over the 2-3 months, though it will be less than forecasted, probably won't be high enough to cause any real pain. Fed might even consider raising rates, who knows? Q2 GDP numbers might be weaker than usual again as businesses might do some front-loading/stockpiling again before the 90-day pause ends in Aug. 

My conclusion is: no recession, no bear this year unless of course there are some drastic escalation again. I will just invest/trade normally. All these tariffs are just pure noise. Any dip is a buy. Even if he announces 100% pharm/semi tariffs, it is still a buy opportunity because we all know it will just be noise eventually. If there is any economic damage, Fed / government will step in to save the day. So no worries of any doom / gloom. 

China emerging as the leader of the new multipolar world order

They can't even win a trade war, or whatever war. To make weapons, they have to rely on China's materials. Therefore they can't even win a hot war. I will look to accumulate China equities when it dips a little, and diversify a little.

Is this 2022 all over again?

Update: some of the below points may no longer be valid due to the recent trade truce.

This is going to be a long post. Many things have happened for the past few weeks. To understand where the market is heading, we need to understand the reasons behind the trade situation as stocks are increasingly mixed with geopolitics regardless of whether we like it or not. This trade situation is much more serious and broader than the first in 2018-2019. Previously I have discussed the motivation behind the trade situation, based on my analysis of the many articles I have read. Let's recap, the objectives are:

1. Manufacturing self-reliant. They want to be able to manufacture their own critical products without relying on foreign countries. Example, semiconductors, rare earths, steel, automobiles, etc. That's the reason why they have wooed Taiwan Semi TSM to setup factories in the homeland. Also that's why they have auto tariffs to protect domestic auto industries, especially against the flood of cheap foreign EVs. What's the reason? In the event of conflicts, they must be able to manufacture their own products, supplies, etc. 

2. Reshoring jobs for the lower-income groups. To re-industrialise some critical sectors and buildup the know-how. 

3. Counter the second largest economy, similar to how they dealt with their main opponent during the first cold war. Also, how they dealt with the rise of Japan from 1960-1980s.

4. Boost government tax revenue for other initiatives like tax cuts, etc. Reduce debt load and the deficit. Boost GDP growth via increasing exports globally. 

However, it is not smooth-sailing to achieve the aforementioned objectives. There will be many hurdles ahead, and there will be economic/non-economic damage in the meantime. But they will still try to do it anyway, as they are very determined to solve the above problems that they perceive as critical. Some of these objectives are not entirely new, they are a continuation from the previous administration. Recall the CHIPS act which was setup to woo TSM to come to the homeland? Every administration has a different style of executing the objectives. But also each administration has some of their own unique objectives due to their governing philosophy (for example tax cuts).  

Final outcome

There are 3 camps here: (1) believe that the troubles will go away with the deals, and the economy will be back to normal, just like in 2019. (2) deals won't make much difference and there will still be substantial headwinds. (3) those in between. 

I am leaning towards (2). With the objectives in mind, I think the final outcome, even after all "trade deals" are done, will be 10% universal on most trading partners, 20-30% for "average" partners and 40-60% for the "worst", proportional to the trade deficits. This is inline with what many experts have mentioned. Think about this: if the second largest economy gets only 20-30%, there is no real need to negotiate or be too serious about it. So they have to come down hard with a much higher level.

 

Recently, there has been a small UK "deal" which many experts dismissed as more of theatrics, rather than any major win. It only affects $6bn worth of imports which is tiny considering the trillions of total imports. Of note the 10% baseline remains,  and during the presentation, they also highlighted the "external revenue" which means they really want to use tariffs as a source of revenue, so all the more the baseline won't go away even after the 90-day pause.  

Deal or no deal?

A real trade deal takes many months or even years to be negotiated. It is unrealistic to expect any substantial comprehensive deal to be signed during the pause. Experts have said that it is more likely for "frameworks" or "MOUs" to be signed instead which might be re-negotiated down the road. 

Fed rate cuts

Analysts have priced in 2-4 rate cuts in the second half of the year to boost economic growth and counter unemployment. The Fed will be in a tough spot since there may be higher inflation and unemployment. Their dual mandate is to maintain low inflation and strong employment. If they cut too soon, inflation may worsen; cut too late, may risk a recession. Indeed, the chair has said recently the risk of stagflation is getting higher. The Fed is not perfect. They have made mistakes before, example during the pandemic when they thought the inflation was transitory and in the end they raised rates too late and had to rush the raise in 2022. This time round,  I think it will be even more difficult not to make a mistake. They also prefer to adopt a 'wait-and-see' approach which means there might be a chance they act too late. 

More coming soon?

There might be more coming: pharma, semi, minerals and others. "All-rounded" to cover almost every critical sector to achieve the earlier objectives.

Market reactions

Meanwhile, every piece of good news, no matter big or small, will get the market excited. To me, the deals don't really matter since they simply point the way to the final outcome which might have been priced in already to a large extent. The market may slowly inch up while bad economic data pulls it down. We have already seen this on Apr 30 where worse-than-expected data caused the market to drop 2% on open.  This coming week, experts have already forecasted inflation to creep up gradually. So bulls and bears are fighting over the next 2 months. I think ultimately, there may be another leg down, unless the trade situation is scaled down significantly very soon. Eventually the market may realise the reality -- higher inflation, increasing unemployment, lower growth, etc. And then there may be headlines running fears of stagflation/recession.  This year may be similar to 2022, a sideways market, but whether it will trend down or up, depends on how the trade and economic situation evolve. 

Update: some of the above points may no longer be valid due to the recent trade truce.

 

Is a bear market coming?

Major indices have staged a remarkable comeback in the past 10 days and recovered most losses since Apr 2. However, whether or not this rally will continue as per normal into a bull market depends on several factors. It is difficult to know whether you're in a bear until you see one / strong signs of lower highs and lower lows, but by that time, it will be too late. Nobody would know for sure and it's always in hindsight that you will realise this is a bull or bear. Even in a bear, there will be strong rallies like this one, example in 2022, where the market is whipsawing while trending downwards. 

Motivation behind this trade situation

To understand where the economy and market is heading, let's examine the movitation behind the current trade situation. I think their main objectives are (1) reshore manufacturing of critical products so as to reduce reliance on foreign countries. (2) bring some jobs back for the lower-income groups (3) encircle/isolate the second largest economy. (1) is especially important as they are currently overly reliant on foreign imports for critical materials and goods.  There are many articles talking about (1).  (3) is just repeating the playbook for how they successfully isolated that "well-known" country during the first cold war which led to its collapse. Now they are partnering with the largest populated country to counter the second largest economy.  Overall, this is a very dire and serious situation for them, as (1) and (3) concern their survival. There are also secondary objectives like increasing their exports to boost GDP and to reinforce their current dominant position in the global economy, thus ensuring their continuous relevancy. With this context in mind, it is likely that they won't give up so easily, that is, this trade situation will last for several months at least, although there might be some de-escalation which may not come soon enough to fend off any economic fallout. 

Any deals soon?

There have been a lot of news regarding talks, etc. Also Australia and Canada have just concluded elections recently and their new leaders are not so friendly towards "them". Hence it is likely talks with these countries will take time and possibly met with obstacles. Even traditional friends like Japan and South Korea are expecting a deal only until July, and there are still hurdles to be ironed out. So deals may not come so soon in the next few weeks, except for India which could be one of the first to sign. Overall I don't think there is much incentive for these countries to conclude a deal so quickly before July. 

Economic data

The April jobs report was released in May and appeared better than expected. Of note, the "nonfarm payroll" of 177k was better than the expected 130k. I'd take this with a pinch of salt as this number is based on surveys which could be inaccurate. In fact, the numbers for previous months have been revised downwards subsequently after being released.  From GPT:

Nonfarm payroll data is a valuable economic indicator, but it does undergo revisions that can sometimes be significant. The Bureau of Labor Statistics (BLS) releases initial estimates based on survey data, which are later adjusted as more comprehensive information becomes available. These revisions can reflect seasonal adjustments, updated employer reports, or benchmarking against more complete datasets

Look at the actual data: https://www.bls.gov/web/empsit/cesnaicsrev.htm

Anyways, data for Jan - Apr are backwards looking and largely untainted by the trade situation. There is also distortion due to front-running by stockpiling. Going forward, experts have forecasted higher prices/inflation, supply chain disruptions, shortages and even mass layoffs due to slowing trade between the 2 largest economies. I think the full impact will be felt during the next 2 months. Such a scenario will be tricky for Fed to cut rates.  If inflation goes up but labor is still OK, the Fed may not cut rates. 

De-escalation

Time is of essence here to minimise ecnomic damage. I think the longer  this drags, the bigger the damage. Previously, Walmart, Target and Home Depot have sought reliefs but did not get any. There are some exemptions already but going forward, I don't think either side will de-escalate (in a meaningful way) unilaterally without any mutual agreement/deal, as neither side wants to be seen as "weak", and they are determined to achieve the aforementioned objectives. I think both sides will need to talk for at least a few weeks before any mutual de-escalation happens. Any comprehensive/serious talk will take several months at least. One side wants to exert max pressure and would not lower voluntarily unless there is some serious situation (example, bond markets, economy crash). Even if there is de-escalation, how much lower can it go to? 50%? 100%? 100%  is still very high and may not reverse any damage. 50% would likely increase inflation and drive lower growth without causing a recession. 

Conclusion

Since the current rally is based on (1) hopes of de-escalation (2) backward-looking economic data and earnings, going forward, without any meaningful de-escalation / rate cuts, the market may likely drop as new economic data worsens over the next several weeks.  The speed and magnitude of de-escalation are both important in determining the extent of future damage. Also, given how furious this rally ocurred, it will need continuous positive catalysts to sustain, otherwise it's likely the current positive sentiment gradually wanes off. Further, deals and de-escalation are unlikely to materialise so soon to support the sentiment. 

Various outcomes are possible: outright recession, high inflation with low growth, etc. I can't imagine any positive outcome, unless the trade situation is entirely resolved, which itself is unlikely. Whether the market has truly bottomed depends on how the trade situation evolves. 

 

Is the market rally sustainable?

With the recent news regarding a potential de-escalation, we're seeing a relief rally. Whether or not this rally is sustainable depends on how soon the de-escalation happens and the economic data going forward. However, there is some mixed messaging: 1) the 145% hasn't gone down yet 2) one side is saying there has been trade talks while the other side denies it. Also what happens after the 90-day pause? The current earning season may be "untainted" by tariffs, so results could be decent/good. But going forward, not so much. So there is still a lot of uncertainty. 

There are a few ways this could play out: 1) both sides de-escalate on their own without any talks, for example, by granting exemptions or simply reducing tariff level. 2) one side reaches out to the other to kickstart negotiations 3) no or little de-escalation. 4) Escalation before de-escalation again.  Scenario 1 may be likely since it is already happening.  Scenario 2 seems unlikely since one side promises to "fight til the end" and demands mutual respect and removal of tariffs, and so why would they negotiate when the other side is de-escalating on its own? Scenario 3 is the least unlikely since it is unsustainable in the long-term. Scenario 4 could be possible. Therefore I think there is a high chance of de-escalation. But to what extent will it de-escalate and how will it impact the economic data? There might still be some level of tariffs on the major economies even after negotiations or de-escalation, and that would weigh on the economy. Since there are too many variables and moving parts, I can imagine it is very difficult for experts to provide accurate forecasts. Hence there will be much uncertainty and possible volatility when the actual data is released in the future, especially when the actual data mismatch the forecasts. 

So far, my nibbling has been profitable. While I don't think the rally will go all the way back to all-time high, I think the market has bottomed out since both sides are trying to avoid negative outcomes.  Any big dip could be worth accumulating. I have been doing hedging using volatility ETFs which I prefer for various reasons that I may reveal over my next few posts.  

Is it safe to buy stocks yet?

It's been a long while since I updated. As shared previously, I am mostly in cash as I have foreseen some turmoil at the beginning of the year. When the major US retailers have started sounding off the alarm in Feb/Mar regarding weaker consumer spending, I sold off most of my holdings. Since then there has been a lot of volatility. I have been trading hedges and volatility ETFs. The sentiment is still very weak with a lot of uncertainty. The 2 largest economies have not yet started negotiation. The tariffs are forecasted to hurt the economy especially with small and medium businesses taking big hits. Inflation will return and growth will slow. There is already some evidence that the stance may be softening, judging by the exemption of electronics and semi, and call for rate cuts presumably to cushion the inflation impact. Afterall, with domestic pressure, and rising unfavorable polls, I don't think the tariffs can continue for too long. In fact, the man himself said there could be a deal with China within 4 weeks, somewhat implying that the whole thing should come to an end or de-escalate soon.  I am doubtful a deal could happen so soon though, if at all, since the 2 leaders are not even talking directly yet. Even if there is a deal, it might be one that is not so favorable, and there would still be some level of tariffs. I don't think all the tariffs will be removed. Further, there might be more coming soon, semi/pharma/minerals tariffs. 

The 2 main uncertainties are how high would inflation go, and how low will economic growth go? Recently, all forecasts have been not very accurate. Going forward, the forecasts will be even more inaccurate given the chaotic situation right now. Any misexpectation will cause shocks to the stocks.

It is really hard to say whether the bottom is in, especially given that there is no Fed 'put'. Will the markets drop further before recovering or just go up from here? Therefore, it might be wiser to just DCA slowly for those long-term investors, and hold really strong stocks that can weather any storms. For me, I will just continue to nibble very slowly while trading hedges. 

    

Almost empty portfolio

 The past few weeks have been a wild ride. The sentiment has been extremely bearish. I had to cut lost my short-term positions. The reason I have not been writing is because I have not taken much actions so far. My portfolio is almost empty now. I am looking for the market to stablize before going in big again. Valuations of some tech stocks look much more attractive than before, but some may argue they are still overvalued. To each his own. I think it's all relative. The stocks I sold have all dropped far below the prices I sold at because I know a big storm is coming so I acted early. Hoping to buy back at lower prices. Yes market timing at work. I am concerned that I might also miss the eventual rebound (if any) so I am just "nibbling" very small positions, to keep myself vested. When the time comes, I may average up to catch the wave. For now, I can only wait. 

So far value, defensive, healthcare and consumer staples stocks are holding up well, and even went up 5-10%. Examples : McDonalds, J&J, Colgate, and many others. Due to my busy schedule, I didn't manage to move my money into these stocks fast enough. Otherwise I could have made some small profits. It is obvious big funds are acting on their risk-off playbooks since many funds are required to remain X% vested.  Tech and AI-related stocks have taken a beating mainly due to overvaluation, overcapacity and economy concerns. It is obvious there is a rotation away from tech stocks due to risk-off sentiments. But the situation is very fluid now, once the bullish sentiment comes back, value stocks will drop and tech will go up again. But for now, it is hard to know when the bullish sentiment will be back. 

On the other hand, I kept missing out on the rally in China markets. I should have paid more attention on what's happening. Europe defense stocks rallied as well which I normally don't even pay attention to and frankly don't know well enough to have a position. Since I don't know whether the rally will continue or even turn bearish from here, I will give it a miss this time round. I sold off China stocks back in 2023 because they were either going sideways or trending down with no signs of recovery, little did we know they would make a comeback in late 2024/early 2025. The China stock rally is mainly due to stimulus, AI play, and more "assurance" that tech crackdown has stopped. Some argue that China stocks are cheap and undervalued but they are for a few good reasons -- economy, government, geopolitical, and even cultural. Cultural in the sense that I don't think they would be able to build up a consumer-driven economy like the US at least not in the next several years as Chinese people just don't really have that mindset of spending money like no tomorrow, unlike their US counterpart. Henceforth this deflation issue would stick around for a while. If government doesn't spend,  the people doesn't spend, we can only rely on corporations to spend to spur the economy. In the past since 2008 GFC, China has relied on large-sale infra building to spur the economy (it has now the largest high-speed rail network and largest cities), it literally built itself out of recession. The economy was spurred to a significant extent by government spending with the people riding on the property boom. Now that all these are slowing down, it is no wonder the economy took a hit. Transitioning to domestic consumption is a very difficult task.  I doubt the stocks will ever be fully-valued or reach their true valuations at least in the next 2-3 years. I am not against them but am saying enter with your eyes wide open. Without giving more details, investors also need to understand the alignment of interests between government and corporations regarding stock markets. US on the other hand, the S&P went up even higher at the end of Trump's first term despite the trade wars (but of course before Covid started).  Will this time be any different as the circumstances are different now with high inflation, weakening labor market? Only time will tell.  Well, investing and trading should be based on probability and calculated risks. If you ask me, the answer is pretty obvious. 

In the US market, from the Nvidia and Broadcom decent/strong results and forward guidance, I think the AI theme still has some room to run, so I am slowly accumulating bit by bit, but don't dare to go in too much since they are still in a strong downtrend. Nvidia in particular looks fairly valued or even slightly undervalued even after considering its slowing growth rate. I don't expect Nvidia to melt-up or even break its own high in the near-term, even when the bullish sentiment is back. Another thing to consider about the semiconductor industry is tariff/export restriction risk. I doubt the 25% tariffs would follow through, as it would really have serious consequences. Overall, considering all factors, I may just take a small position or go for an ETF instead, or maybe go for a larger short-term position. The AI industry is expected to grow 15-20% CARG until 2030 which is in line with historical tech trends like Internet, smartphone, etc. It usually takes several years for new tech to be improved and widely adopted. I am also looking at the cybersecurity sector, specifically the ETFs, not individual stocks like Crowdstrike/Cyberark since their sky-high valuations are undergoing a correction right now. It seems like quite a defensive sector due to increasing cyber attacks / data leaks. In fact, cybersecurity is one of the top concerns cited in a global business leader survey.  

During my research, I also found out about some very interesting high-yield US ETFs giving >10% annually. Stay tuned for the next blog post!