Investors are making one big mistake while watching the Trump trade war

Brian Sozzi

A euphoric stock market will still have to confront several major challenges in 2020 even if President Trump signs off on a “phase one” trade deal with China.

One market veteran thinks it would be in the best interest of investors if they don’t make the mistake of believing a trade deal with China cures all ills. Because being complacent in rising markets is often a surefire way to get burned.

“Investors have made the mistake over the last couple of months of seeing the U.S.-China trade deal as the finishing line for global trade tensions,” JPMorgan Asset Management global strategist Alex Dryden said on Yahoo Finance’s The First Trade.

Dryden adds, “That’s not true. Actually what we have seen in the last few weeks is the first rumbling of tension between the U.S. and Europe, look at the French tax on technology. Look how the U.S. has threatened to respond to that. This is not an easy trade relationship. It has the potential for conflict and the chance for economic fallout is quite high. Investors shouldn’t kid themselves, the U.S.-China trade deal will not mark the end of global trade tensions going into 2020.”

Aside from the risk of a souring trade relationship with Europe, investors will have to battle higher equity valuations (and the higher expectations that come with it) and ongoing weakness in U.S. capital expenditure spending.

Looking at the markets at the moment, investors appear to continue to commit the mistake Dryden references.

In part supported by three interest rate cuts this year by the Federal Reserve and a belief in a “phase one” trade deal will get done soon, the Dow Jones Industrial Average and S&P 500 have risen by more than 25% in 2019. Many trade war impacted stocks such as Apple have surged (Apple is up 70% year-to-date), ditto for sectors like semiconductors and industrials.

Complacency based on pure hope in its finest form.

And Thursday brought more of it.

The S&P 500 hit a fresh record after Trump said the U.S. and China were closing in on a trade deal ahead of a Dec. 15 tariff deadline. A report from The Wall Street Journal said U.S. negotiators are offering to halt new China tariffs and lower current levies on the country’s goods by up to 50% on $360 billion of imports.

(AP Photo/Richard Drew)
(AP Photo/Richard Drew)

A White House spokesperson declined to comment on the report.

One way to avoid mistakes in a currently hot market bulled up on trade hopes is to allocate cash to very unloved sectors. Numerous sources on the Street who Yahoo Finance have talked with suggest it’s time to wade into the beat-up energy sector. The reason is simple: valuations are at such depressed levels, a good number of the stocks would unlikely be sent significantly lower if global trade conditions worsen, as Dryden hints could happen.

“I think we have become more enamored with things like energy. It’s one of these sectors that have been left behind,” says Lockwood Advisors Chief Investment Officer Matt Forester.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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