Landon Whaley urges traders to stop following U.S.-China trade deal rumors and watch the financial data.
Last week, the “breaking news” was that Chinese President Xi and U.S. President Trump were in talks to meet at Mar-a-lago sometime in March. Folks, there are narratives constantly being spun and paraded around as the most important thing going. The reality is that nothing matters more in markets than the damn data. At some point, markets always move in the direction that is dictated by that data.
If this meeting occurs between Trump and Xi, it’ll be as important to markets as the last time the two shared a romantic meal together, in Argentina. Do you remember that “breaking news” moment?
The two met on Saturday Dec. 1, and after reaching a truce in the trade war, global financial markets rocketed out the gates the following Monday.
The S&P 500 gained +1.0% and Chinese equities had their own bullish day, gaining +1.5%. Unfortunately for the bulls, the Fundamental Gravity was too much for the trade truce to handle. The S&P 500 declined in 12 of the next 14 days, losing -15.6% in the process before bottoming on Christmas Eve. In a similar fashion, Chinese equities declined in 14 of the next 19 trading days, losing -9.5% before bottoming on Jan. 3.
What happens with Trump, Xi and China (or any other country) only matters when it shows up in the data. For instance, U.S. GDP growth in Q2 2018 was hugely impacted by a spike in soybean and other agricultural exports ahead of the tariff implementation. This huge spike then mean-reverted in the Q3 GDP report, but it singlehandedly kept the U.S. growth-accelerating streak intact for eight consecutive quarters from Q3 2016 to Q2 2018.
Similarly, last week’s report of Q4 2018 GDP showed that this same “net exports” input singlehandedly pushed GDP growth to a 10-basis-point acceleration from Q3’s +3.0% growth. Presumably the unexpected hockey-stick in exports was catalyzed by a desire to get out in front of whatever Xi and Trump would cook up during Q1 2019.
There are two things to note: First, net exports jumped 1.77 points, which is a huge acceleration and masked a sequential decline in consumption (-0.7%), investment (-10.6%) and government spending (-2.2%). Second, net exports are the most volatile component of the GDP calculation, impossible to predict and the most likely to be revised in future iterations of Q4 GDP in the months ahead.
Whether U.S. GDP can hold its 10th consecutive quarter of accelerating growth status in coming revisions is not the focus here (though we seriously doubt it).
The “Headline Risk” bottom line is that you don’t have to keep up with every narrative-driven headline like a cat chasing a laser pointer. The data will set you free. Being data dependent gets you paid; being narrative dependent gets your portfolio body bagged. Period.
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