It was all about the trade deal this week. Both sides seem to want a resolution to the crippling tariffs that have sent the world's economies to the brink of recession. The relief that investors feel is reflected in the new highs we are enjoying at the moment.

 

I say "at the moment" because anything can change with a tweet. However, given the mounting problems of the Trump presidency, I believe he needs something positive (and fairly soon) to divert the nation's attention away from the impeachment hearings next week.

 

Trump appears willing to drop, or at least roll back, some (or all) of the tariffs he put in place, but he can't be seen as too "soft" in the negotiations. That's why it was no surprise that on Friday Trump tweeted that he still has not agreed to grant tariff relief to the China, a sticking point in the negotiations. That took some wind out of the market's sails, but I see it as just more of the same Trump tactics that have become increasingly obvious and predictable.

 

And if I see it, so does China. From their point of view, why not sign a deal? They expect to get everything they want and nothing they don't want. China will allow more financial services companies to set up there, but they were already planning on that before the tariff war. They also get to import all the agricultural products they need, but U.S. farmers will only increase exports back to the level they were before the trade war.  At the same time, the Chinese remain steadfast in not giving in to anything more despite Trump's demands and threats over the last two years.

 

What, you may ask, was the purpose of all this bravado, these tariffs, and such? The administration will say that this is "only" Phase One. The real substantive issues will be tackled "later." No one has issued a timetable on Phase 2 or, if there is one, a Phase 3. China is not giving any indication that they are ready to do more than they have already agreed upon.

 

If it were any other politician but Donald Trump, I would say that further progress on a comprehensive trade deal (that would truly benefit the U.S.) would be tied to the 2020 election results. In the meantime, the president can stump the country, claiming a trade deal victory.

 

Only the fake news could possibly see this Phase One for what it might be — simply a way to keep the suffering farmers and ranchers within the president's base from flying the coop come next November. But, as we all know, our president is not a politician. Our president is an honest, truthful man that is simply misunderstood by the majority of Americans.

 

And China is not the only country that may see some relief from American tariff threats. The president has until Nov. 13 (his self-imposed deadline) to decide whether he will levy additional tariffs on European autos. You see, the president believes that EU auto imports to the U.S. pose a serious security threat. But I'm betting that won't happen. I would expect a surprise announcement to coincide with the televised impeachment hearings next week. As for the security threat, well, that was then, and this is now, right?

 

Where do the markets go from here? I remain bullish, possibly through the end of the year. Saying that, however, I believe we are overdue for a minor pullback of 3-5 percent or so, but it would be a dip to buy, not to sell.

 

As third-quarter earnings wind down, the Fed cut interest rates again this week. Since both events seemingly matched investor expectations, what, then, will investors worry about in the coming months?

 

As predicted, the S&P 500 Index hit a modest new high this week based on the central bank's one quarter-point cut of the short-term Federal Funds interest rate on Wednesday. Robust earnings from certain favored companies, like Apple and Facebook, also helped sentiment and so the averages ground higher.

 

"You would think," said one miffed investor, "that after two years trapped in a trading range, we would have had a little more enthusiasm over this break-out."

 

Instead, traders simply took it in stride and actually took profits. One reason for the lack of enthusiasm could have been that investor sentiment was already bullish. The averages simply confirmed what we all expected would happen. Investor sentiment seems to confirm that.

 

The U.S. Advisors Sentiment indicators released this week had market bulls pegged at 54.2 percent versus 52.8 percent last week. From a contrarian point of view, any reading above 50 percent should invoke some caution among the trading crowd. At the same time, the number of pros who are expecting a market correction declined to 28 percent from 29.3 percent. Readings under 30 percent also signal a more cautious approach to the markets.

 

On the plus side for the markets, we are now over the September-October period when stocks usually do their worst. November through January is normally the best of the best months for positive stock market performance. The question is whether historical data matters at all, given markets where politics mean more than fundamentals.

 

The trade war, in my opinion, will continue to cast a sobering shadow over the stock markets in the months ahead. As readers are aware, I thought this "skinny" deal between China and the U.S. was a joke. It seems that more investors are now realizing the same thing. The president's latest "phase one trade deal" is much more a public relations stunt and less a meaningful breakthrough. The Chinese seem to agree.

 

The hope of signing even this paltry deal has now been postponed, since Chile canceled the upcoming November conference (due to political unrest) where Xi and Trump were supposed to meet, greet and sign the deal. Investors worry and wonder whether any deal will be signed at all. In my opinion, it is simply more of the same drama we have been putting up with for the last two years.

 

Thursday, for example, "unnamed officials" in China let it be known that they did not hold out much hope that any substantive deal with Trump would ever be signed. The markets dropped immediately. So, what's next? We should expect either Trump (through tweets or an impromptu Q&A with the fake news) or some administrative official (it is usually former CNBC fake newsman, Larry Kudlow) to run out and to assure us all that everything is just perfect, that the economy is great, that negotiations are going better than expected, yada, yada, yada.

 

It comes down to this: investors and the nation are ping pong balls in this global trade game. How you deal with that depends on your level of cynicism. Should you believe those "no good Chinese," or in the honesty and sincerity of the self-described "greatest president in the history of the United States?"

 

Aside from that drama, we have the impeachment inquiry that is heating up and coming to the attention of more and more Americans. I expect that Trump, in an effort to strike back at the Democrats and change the focus of the nation away from impeachment, may create a confrontation with the outcome being a possible government shutdown later this month. I warned readers in my column last week that there is a high probability that the president will use funding for his wall as a pretext to shut down the government once again -- just in time for Thanksgiving.

 

So far, third-quarter earnings results have been all over the place. A mixed bag of beats, in-line numbers, and some big disappointments have kept the stock market treading water.

 

Companies such as Caterpillar, with large exposure to China, came in with lower than expected results. Boeing, another big Dow stock, also reported a 50 percent slide in earnings thanks to the problems generated by two crashes of their 737 Max aircraft. And yet, both stocks rallied on the news.

 

Semiconductor company Texas Instruments also issued poor earnings, sales, and guidance, but in this case, investors not only punished the stock but trashed the entire semiconductor sector along with it. McDonalds, UPS, Lockheed, Amazon and Travelers Insurance, all mega-cap companies, also cratered on disappointing earnings.

 

To be sure, most of the disappointments were company-specific, so there is little one can glean about the health of the overall economy from the results. The majority of companies, however, are meeting or beating earnings expectations, which is what one should expect in a normal earnings season. Readers should know by now that analysts low-ball earnings estimates early, so that companies can beat Wall Street expectations when they report.

 

This earnings divide, thus far, does give some useful hints to those who are paying attention to the underlying price action. Most industrial stocks, for example, have sat out this year's rally as recession and China trade war fears kept investors away from investing in this area. So why did Caterpillar (CAT) not fall after disappointing earnings this week?

 

I suspect that some investors are betting that we are at the bottom of the economic cycle. While many analysts believe overall earnings for this third quarter will be down an average of 3 percent, they also think that this might be the trough in earnings. Bulls are expecting fourth quarter, and next year's earnings growth, to rebound.

 

If so, then cyclical companies like CAT could present real value. Remember that industrial stocks are economically sensitive. If one looks at past cycles, industrials were usually one of the best performing sectors coming out of a trough one year later.

 

The question to ask is whether this cycle will be similar to the last 11? That, of course, leads us right back to the trade wars and what the Fed may do on the interest rate horizon.

 

Do you bet on Trump caving in and rolling back all the tariffs he has levied thus far, or do you expect him to double down and implement the threatened tariffs he has scheduled for December? Given that most investors are worried about an economic slow-down brought on by an escalating trade war, those who are buying industrial stocks and other cyclical sectors are making a rather ballsy contrarian bet on the future health of the U.S. and global economies.

 

From an overall market perspective, some hesitation here (at less than 1  percent from all-time highs) is understandable. It may have been too much to ask that third quarter earnings would be the catalyst we needed to break out and up to new highs. We also still have a week to go before exiting October, a notoriously volatile month for the markets.

 

But before you despair that stocks will ever breaking out of this two-year trading range, remember the Fed, which meets next week. If they perform in line with investor expectations and cut interest rates yet again, we just might get an excuse for that breakout.

 

Great Britain's House of Parliament is voting on yet another proposal to exit the European Union this weekend. While Prime Minister Boris Johnson and the President of the European Union, Jean-Claude Juncker, have a tentative agreement, there is no guarantee parliament will vote for it.

 

In this world of binary events, financial markets are looking at the vote as a black or white outcome. Parliament votes yes and the British pound, world stock markets, and the European Union (EU) celebrates. If, as they have done in the past, the British politicians vote no, then gloom and doom will likely beset the markets.

 

My own opinion is that a no vote will simply send the various parties back to the drawing board to hash out another compromise, which, in turn, will be presented to parliament for a vote. As I wrote several weeks ago, I do not believe a "hard" Brexit will on Oct. 31, occur as Boris Johnson has threatened. Either there is a resolution this weekend, or the can is kicked down the road one more time.

 

And speaking of ongoing debates, once again there seems to be a wide distance between what President Trump announced last Friday and the facts. While Trump claimed a "Phase One" deal was done, Chinese spokesmen said there is no deal forthcoming, unless the U.S. removes the tariffs Trump has levied on China.

 

In this age of disinformation, there is little trust in any news story, government announcements, presidential tweets or political speeches and press conferences. What passes for truth is largely propaganda, and depending on your political persuasion, you believe what you want to believe, regardless of the facts. Facts have become dispensable. You believe them if they conform with your opinions, you deny them as "fake news" if they don't.

 

This week, many market participants have been confounded by the continued strength of the markets in the face of the phase one trade farce. By all rights, the markets should have given back all they have gained, but they didn't. Instead, all the averages have ground higher and are now within a percentage point or two from all-time highs. The explanation is simple and summed up in two words — the Fed.

 

Traders are expecting the Fed to cut rates once again at the end of this month and possibly to indicate further interest rate cutting is in the offing. That expectation should be enough to at least support the markets. What could move stocks higher would be a robust earnings season, which has just begun. Week one of third-quarter results was not too bad.

 

The banks reported mixed results, but that was better than most analysts expected. Many investors want to see earnings results from the technology sector before making up their minds to either hold what stocks they have or just buy more. I suspect earnings will come in better than expected, but forward guidance will likely be neutral, or at least not as bad as some may have feared.

 

Between the Fed and earnings, the markets should be able to at least muddle through the rest of the month. Of course, that prognosis could fly right out the window with just one tweet from the Mad King. Hopefully, between the impeachment inquiry, the new outrage over Trump on picking his own golf club to host the G-7 meeting, and his fight to keep his taxes (two sets of books) secret, Trump won't have enough time to melt-down on China or the Fed.

 

But don't underestimate Trump's penchant to create chaos. Just look at this week's disaster on the Turkish-Syrian border. Of course, voting in a Vietnam draft dodger as our commander-in-chief was beyond me in the first place, but what do I know?

 

Global markets regained their footing this week, as expected good news on the trade front produced a "relief" rally in equities. Who cared that there was little substance to the deal? Investors decided that even a tiny deal was worth more than no deal at all.

 

As I wrote last week if "Trump believes he needs a 'win' to counter the slowing economy and the impeachment inquiry, then even a half-hearted deal might be in the cards. In which case, we could see a 10-15 percent move higher in the averages."

 

But before we pop the champagne, I want to see exactly what the trade deal agreement actually says. So far, we know that both sides have agreed to some kind of currency manipulation. Sources say the Chinese promised not to devalue their currency, which is something that they have been doing to reduce the impact of U.S. tariffs on their exports for the last six months. In exchange, the U.S. will not levy new tariffs on their goods.

 

Then there is the Chinese willingness to buy more food from the United States. We don't know the details, but grains and maybe hogs might be on their shopping list. The real substance of any meaningful deal from a U.S. point of view would be progress on protecting our companies from intellectual property theft and technology transfers. There has not been any mention of those issues.

 

I will go out on a limb here and call this a win-win for China. None of the substantive issues have been addressed. The currency agreement, as well as the Chinese agreement to buy more agricultural products, are Chinese offers that have been sitting on the negotiating table since February, if not before.

 

As for the currency agreement, international investors should be overjoyed since it mitigates one of the two main risks of investing in Chinese stocks and bonds. As in all foreign countries, you have market risk (stocks go up and down) and exchange rate risks.

 

For example, a few years ago in Europe, stock markets enjoyed double-digit returns. At the same time, however, the Euro weakened considerably. While that was great for EU exports, it really clocked U.S. investors. Just about all the capital gains generated by stocks were whittled away by the currency losses. It is one reason why foreign investments are almost always riskier than those at home, which are denominated in the U.S. dollar. The deal should make Chinese investments more attractive, while allowing the Chinese to return to their comfortable and stable managed currency float.

 

To understand why additional Chinese purchases of food from the U.S. is a win for them, readers need to understand that China has a lot of mouths to feed -- almost one quarter of all human beings on the planet. A daunting task for a country that only holds 7 percent of the world's arable farmland! To make matters worse, urban expansion and break-neck industrialization over the last three decades have put even more pressure on China's agricultural land bank.

 

In addition, as I pointed out in a column a few months ago, China is also grappling with a highly contagious and fatal hog virus that has decimated their pig production. It has practically wiped out half of their entire herd, sending prices skyrocketing and consumption of hog products falling. So, any deals on importing more food to China is a hands-down win-win for China.

 

The problem I see for the U.S. stock market and our economy (as well the global economy), is that without an end to the U.S./China trade dispute, this "skinny" deal will simply kick the can down the road. It will do nothing to change the dynamics of the last year and a half.

 

Corporations will still stand back, investments will continue to falter, Trump will continue to threaten more tariffs (when he feels like it), and confidence will sag. Over time, the manufacturing recession will spill over into the rest of the economy and at some point, the stock market will recognize this.

 

On the political front, I suspect there will be no final deal until after the 2020 election (if ever). The Chinese got what they wanted and can play the long game, while Trump faces impeachment. The president will likely try to use his skinny deal to impress and distract his base while promising a real "tough" deal if he is re-elected. In the meantime, I expect the global economy will continue to slow with the U.S. economy dipping into recession sometime next year.

 

Readers may recall that I saw right through the Trump tax cut of 2018. After an initial bounce, the stock market has gone nowhere, the economy has fallen (instead of growing), and none of the president's or the Republican Party's promises amounted to a hill of beans. It took the stock market some time to figure that out. We have a similar situation today, only now it's the China deal.

 

I say enjoy the ride while it lasts. As a cynical contrarian, I suspect we could see new stock market highs ahead. However, for me, it feels more and more like the final run before a change in strategy. Sometime this fall into winter, investors should begin to contemplate an exit strategy. Let's monitor the situation and by all means keep reading.

 

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.