During the past few weeks of this presidency, both the Trump administration and Congress have levied additional sanctions against the People's Republic of China. Financial markets and U.S. corporations have largely ignored those efforts; here's why.

 

Investors have learned over the past four years that tough talk on trade tariffs, blacklisting and other threats were largely ineffectual in curtailing the world's second largest economy. The facts are that U.S. tariffs on Chinese goods have been a failure. Our trade deficit with China is higher now than it was before the trade wars.

 

China's trade gap with the U.S. was 43 percent bigger in September, for example, than when Donald Trump took office. The surplus overall is 18.86 percent higher than a year ago and the trade gap between the two nations is on track to exceed $600 billion by the end of this year. That would be the highest since 2008.

 

The only difference investors could see in all this expended energy is that U.S. corporations (and consumers) have had to pay more for some imported Chinese goods. Aside from that, our farmers lost billions of dollars and had to be compensated by additional tax dollars for losing market share to Brazil and other nations in certain agricultural products like soybeans.

 

Last week, on the financial front, the delisting of Chinese companies under the House passage of the Holding Foreign Companies Accountable Act, looks good on paper, but not so much once you read the fine print.  The act would require U.S. regulators to review the audit books of all U.S.-listed Chinese companies. If they refuse or fail to come into compliance under U.S. acceptable accounting standards, they will face delisting.

 

Conveniently, the bill's authors failed to mention that U.S.-listed Chinese companies are already audited by the largest U.S. accounting firms. The "Big Four" accounting firms (PWC, Deloitte, Ernst & Young, and KPMG) apply the same standards in auditing these Chinese companies as they do in auditing companies in the U.S. and Europe, as well as their clients around the rest of the world.

 

In addition, the Securities and Exchange Commission (SEC), which is charged with enforcing the act, has already made quite a bit of progress in developing a workable framework that would solve these issues. The SEC proposes having Chinese companies listed in the U.S. audited and reviewed by firms located in jurisdiction that are accessible to U.S. regulators.

 

The China Securities Regulatory Commission (CSRC) appears to have no problem with that solution or the act. The CSRC already assumes that Chinese companies listed on U.S. stock exchanges follow U.S. laws and regulations for financial reporting and information disclosure. From Chinas' point of view, anything that can help regulate and identify the few bad apples among thousands of listed Chinese companies is a welcome addition to their own regulatory efforts.

 

For Wall Street, the delisting threat may, at most, create some minor short-term sentiment that could pressure Chinese stocks, but there is simply too much at stake to see a wholesale delisting of Chinese stocks. There is almost $2 trillion of U.S. money invested in Chinese equities today. Companies such as Alibaba, Baidu and JD.com have become as familiar to Americans as IBM and delisting the lot would throw the financial markets into chaos.

 

The U.S. strategy of blacklisting certain other Chinese companies such as telecom giant, Huawei, plus dozens of other companies, has done as much harm as good to the U.S. and its corporations. Our semiconductor sector, for example, has experienced severe supply dislocations and costly business interruptions because of the Huawei crackdown.  

 

Dozens of other firms that the Commerce Department has added to its "entity list" have caused unexpected repercussions as well. Many of these Chinese firms are accused of either helping to spy on China's minority population, the Uighurs, or of having ties to China's military. Many of them are customers of our own technology and cloud-based computing firms. Some U.S firms may have had joint ventures with these companies or garnered a substantial portion of business from these companies.

 

From my perspective, the incoming Biden Administration gives the U.S. a chance to re-examine the direction our country has taken in answering the "threat of China." If Director of National Intelligence John Ratcliffe was right when he said last week that "the People's Republic of China poses the greatest threat to America today," then we better up our game in ways that may not make great headlines, but instead protect our interests far more effectively than they have in the past.

 

The first week of December saw all three major averages climb to minor new highs. The trigger was more good news on the delivery timetable of the coronavirus vaccines. The expected speedy distribution of the first batch of wonder drugs encouraged investors, even while the number of COVID-19 deaths and cases nationwide continued to skyrocket.

 

In addition, a new dose of hopeium has infected investors on the stimulus front. The Democrats $2.2 trillion proposal has gone nowhere since July, thanks to the Republican-controlled Senate. The Democrats then reduced their price tag in an effort to forge a compromise before the election, but the Republicans refused to spend more than their initial $500 billion offer.

 

The House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer, have dropped their offer once again this week. It now matches a new bipartisan proposal of $900 billion that could forge a compromise bill during the next two weeks. Friday's November non-farm payroll report may have clinched the deal.

 

Job gains were much worse than expected with U.S. employers adding 245,000 jobs versus 465,000 jobs that were anticipated. December's data could see the job gains disappear altogether. That might jeopardize the outcome of the January 5th run-off senate elections in red state Georgia for Republicans.  

 

I see politics at play. Senate Majority Leader Mitch McConnell, while suddenly finding "fiscal responsibility" after four years of unbridled deficit spending, has been steadfast in his refusal to compromise on his $500 billion stimulus package. This is despite the pleas of the vast majority of governors, and state legislatures from both parties, for help from the federal government. Before the elections, even our lame-duck president had pleaded with the Senate to pass at least a $2 trillion stimulus package to no avail.

 

The Democrats' new willingness to compromise further can be credited to President-elect Biden, who indicated to his party leaders that some relief for the nation is better than no relief. This week's labor report places McConnell between a rock and a hard place. If he goes along with too much stimulus, he will risk the ire of conservative voters in Georgia. On the other hand, too little stimulus, and he will galvanize more Democrats to come out and vote in an already tight race.

 

The betting at present is that a deal will get done but investors have been burnt several times before in this stimulus sweepstakes. Regardless of the bickering, the clock is ticking, the COVID-19 deaths are mounting, and the cold weather has arrived. But I suspect the markets will continue to ignore the gathering storm clouds unless a real darkness descends, and investors get spooked.   

 

As most American investors continue to focus on the U.S. stock market, a number of other equity markets are notching up some great gains. Emerging markets, which are typically resource-heavy nations, are enjoying both the benefit of a declining dollar, as well as price increases in natural resources.

 

My attention is also focused on equities in Southeast Asian nations such as Japan, South Korea, Taiwan, and Vietnam. Indonesia and Thailand may be next year's story. These economies are recovering quickly, thanks to a concerted effort to combat the spread of the coronavirus. Even China, despite the continued bashing from the U.S., is pulling ahead of us on most fronts and enjoying the benefits. I expect that next year we will see those markets continue to do well, and in some cases, outperform the U.S. stock market.

 

On the home front, investor sentiment continues to be frothy. The technical charts and other variables I look at indicate a building of overbought conditions as well. In the short-term, the certainty of a stimulus deal could be worth another 100 points or so on the S&P 500 Index before we get another pullback. What could cause a decline? The coronavirus numbers might finally freak out even the most bullish of traders or it could be some other excuse. If so, it won't be a devastating sell-off (more like 3-5 percent), but it could arrive just in time for the winter holidays.   

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In the meantime, I expect the cyclical and natural resource trades to continue, while technology takes a back seat. I would also look to add some precious metals to my portfolio during these next few weeks, if gold, silver, palladium, and platinum continue to fall. And for those speculators with a stomach for risk, Bitcoin also looks interesting to me on a pullback.

 

It was a good week for investors, which is not surprising since Thanksgiving week has been kind to investors in the past. The question is, will December fulfill its role as one of the year's best months for stocks?

 

The short answer is yes, I don't see why not. My recent target for the S&P 500 Index is 3,800, but it is possible that I may be too conservative. An additional spike up to the 4,000 level might be in the cards sometime early next year, but one week at a time. What is the bull case for those lofty predictions?

 

I have long argued that a coronavirus vaccine was key to the economy and the market's future performance. We now have at least three vaccines with possibly more in the wings. That is a game changer, in my opinion. While distribution of these medical wonder drugs will take time, markets are discounting their successful distribution now, not when it happens in three to six months.

 

While I expect the present surge of COVID-19 will ravage the nation throughout the winter (as happened in the 1918 influenza pandemic), there is some hope that the government could come to the rescue in ways it has failed to do leading up to the election. Most observers around the world would give the U.S. failing marks in handling the pandemic. What is worse, there has been a notable vacuum in leadership in Washington since the election, even as deaths and cases skyrocket. That void in leadership is increasingly being filled by the president-elect by default.

 

Plans to combat the coronavirus and alleviate its worst impact on Americans, a viable and far-reaching program to distribute the vaccines, and the willingness to spend what it takes to accomplish that mission, have given the country and Wall Street new hope. Rather than Armageddon, which was predicted if Joe Biden and the Democrats won the election, the nation has been impressed by Biden's picks for cabinet positions this week. In addition, Janet Yellen's selection as U.S. Treasury secretary (the first woman to fill that post), has met with approval from the business and financial sectors.

 

It was Biden's election and his subsequent actions which has propelled the stock market to new highs in the past weeks. President-elect Biden's initial moves appear to have reassured Wall Street and many conservatives that his will be a moderate path forward. Until that proves wrong, the financial markets should continue to gain.

 

As I have been pointing out during the last two months, underneath the overall averages there has been a sea change occurring in the market's leadership. Technology, especially the large-cap leaders that have propped the market up in recent years, are relinquishing their leadership role (at least temporarily). In their place, industrial, transportation, materials, financials, and other cyclical parts of the economy have been given a new life, as reflected in their stock prices.

 

Basic materials, led by copper, a key ingredient of any worldwide economic recovery, have soared. Energy stocks, the worst performing sector of the markets by far this year, have seen double digit gains. The price of oil has lifted as traders anticipate additional demand by a world in economic recovery. Two casualties of this switch from tech to value and cyclicals has been the "safe haven" plays of the U.S. dollar and gold.

 

The dollar, as measured by DXY, an index that measures the value of the greenback relative to a basket of foreign currencies, is hovering just above a major support level at 91.75-92. A break below that would likely send the dollar a great deal lower. Gold has also fallen below the $1,800 an ounce level.

 

Normally, a declining dollar would be good for gold, since it is perceived as an alternative form of currency, but not right now. Investors believe that without the need for a safe haven, and with little to no inflation on the horizon, why hold gold? My own belief is that attitude is extremely short-sighted. I believe gold has a life of its own and fears of inflation next year could spark a resurgence. The precious metal may fall even further over the next two weeks, and if it does, I would be using that decline as a buying opportunity.

 

The number of COVID-19 cases and deaths are surging way beyond those cases earlier in the year. That could indicate tough going for the economy over the next two quarters. On the other hand, two highly effective coronavirus vaccines have been announced, but won't be widely distributed until next year. In the middle sits the stock market investors.

 

We know that financial markets are discounting mechanisms, meaning that investors usually buy or sell stocks based on what may happen in six to nine months from now. At that time, so the story goes, at least two vaccines will be readily available to most of the public. One may be ready for limited distribution before the end of the year if all goes well. That should cause the economy to rebound and unemployment should decline. That is a bullish case for equities, so investors would normally anticipate that and buy now.

 

However, in the near term, the next three-four months, thanks to this second coronavirus surge, the economy is expected to slow, and unemployment to rise. The expectation that little to no fiscal stimulus is forthcoming from our divided government adds to investor worries. The impact on the economy in the short-term could be severe as a result. It is fairly certain, according to most economists, that the reason the economy bounced back as quickly as it did from the first nationwide shut-down was the quick response by the government to  monetary and fiscal stimulus.

 

As of this week, there are no plans for a countrywide shutdown. Instead, individual states, cities, towns, etc. are closing some things down and leaving others open (schools versus bars and restaurants for example). Most businesses are simply ignoring all of it, while trying to convince workers that everything is all right when it isn't.  

 

As a result, the coronavirus case numbers are increasing exponentially. Worse, there appears to be no way to prevent it. Next week, a large segment of the population is already making plans to visit the family for Thanksgiving week, despite medical advice to the contrary. The way we are headed, I expect that the caseload in hospitals should continue to mount. Friends, families and neighbors will continue to die and, at some point, a partial or total shut-down of the economy could occur out of necessity.

 

If so, this time around I expect there won't be an immediate stimulus response from the government. That could do lasting damage to the economy and prolong the time required to recover. Despite pleading from the Federal Reserve Bank and just about every economist in the nation, both the president and Congress are not listening. Both parties are far too engrossed in debating who won the election (or who will win the Senate in January) to worry about another couple hundred thousand deaths, let alone jobs and the economy. It is the America we live in.

 

Normally, the week leading up to a national holiday such as Thanksgiving, is positive for stocks. This year, the averages will likely be tugged in two directions — the bearish, daily rise in COVID-19 cases versus more good news on the vaccine front. It doesn't take a rocket scientist to predict the bad news should get worse, which leaves the markets dependent on more vaccine news to remain buoyant. 

 

The first real hope at ending the global coronavirus pandemic was announced on Monday. Drug company partners, Pfizer and BioNTech, announced their COVID-19 vaccine, which exceeded expectations. The news sent world stock markets screaming higher.

 

Later in the week, some profit-taking developed, but overall the news was met with relief and cautious excitement. Most investors expected the Pfizer drug would be, at best, 60-70 percent effective, so when the company announced it was more than 90 percent effective in preventing COVID-19, stocks soared.

 

While this was great news, there are a few drawbacks to the vaccine. For starters, Pfizer can manufacture only a limited quantity of the vaccine next year. Analysts are using a guesstimate of 1.3 billion doses. If that sounds like a lot, it is, but much of that supply (80 percent) is already spoken for by the U.S., Canada, Japan, the E.U. and the U.K. Second, in order to work, you need two doses. The most optimistic assessment is that no more than 12 million vaccine treatments could be available by the first quarter of next year.

 

The other issue with the vaccine is that it needs to be maintained, stored, and transported at really low temperatures — minus-176 degrees Fahrenheit. To give you an idea of what that means, your typical American freezer runs at about zero degrees Fahrenheit. As such, in order to be effective, the vaccine requires a super-cold freezer, which is unavailable in most hospitals, clinics, and doctor's offices and that's in a developed world country. Low and middle-income nations (think emerging markets) would not be able to take advantage of this vaccine easily, even if it were available to them in 2021.

 

Some of the market's euphoria wore off as the facts became known, but it was interesting to watch what market sectors did well, and what didn't, as the week progressed. Cyclical areas of the market and value plays did the best on Monday and Tuesday. Small-cap stocks and financials also led the indexes higher. Interest rates on long-term bonds rose, while gold and silver plummeted. Technology shares, long the market leaders, also sat this one out.

 

This all made some sense. A successfully-administered vaccine would ultimately put an end to the pandemic. In turn, global economies would begin to rise. Those sectors that had been hurt the worst by the coronavirus would benefit the most, while the "defensive plays" — stay-at-home stocks and technology shares — would no longer be the only game in town.

 

Higher economic growth would also mean greater inflation risk, so bond holders would want a somewhat higher rate of interest to compensate for that possibility. Higher rates are good for financials, so bank stocks gained.

 

As is usually the case, once investor excitement dissipated a bit, profit-taking set in during the latter part of the week. Traders snapped up some oversold tech shares, while taking profits in some airlines, cruise lines, and the like. The question is what happens next?

 

As readers are aware, I have been warning for months to expect a pandemic "dark winter" in the U.S. and some other parts of the world. In November so far, more than one million new cases of COVID-19 have been confirmed throughout the U.S. It will likely get worse. Should lock-downs nationwide occur, or more likely, selected closings on a state-by-state basis, which is happening as I write this, it could hurt investor sentiment, as well as economic growth and employment.  That may keep a lid on the averages in the short term.

 

As a contrarian, the recent surge in optimism in the AAII Investor sentiment Survey is also somewhat troubling. Bullish sentiment improved by 17.9 percent last week. That brings the number of bulls to 55.8 percent. That is a seven-month high, while the number of bears declined to 24.9 percent. Those numbers make me cautious in the short run.

 

As for politics, in the face of the worst surge in coronavirus cases and deaths thus far, there is silence from the White House. I won't comment other than to say that the markets have already given their verdict, and nothing that has transpired this week has changed that narrative. Market catalysts that could drive the markets higher would be additional good news on additional vaccines, which is expected, and some progress on a stimulus package to help the nation through the next few months. I expect one or maybe both to happen, although a stimulus breakthrough is a long-shot. Until then, expect some volatility.

 

I still believe we continue higher through the end of the year. For now, let's pencil in a possible S&P 500 Index target of 3,800.