In case you didn’t notice, the current situation in the stock market isn’t normal. Investors seldom face the kind of uncertainty now surrounding a potential trade agreement with China.
Sure, many of us remember the dotcom meltdown or the financial crisis. But those were long processes over several quarters. Lots of news came out gradually to paint a picture for investors. Markets are can handle situations like those, pricing in little bits of news here and there. The results were steady trends: not necessary bullish, but tradable.
The China conundrum is totally different. If Presidents Trump and Xi reach a trade deal, odds favor a surge of confidence. The same negativity that has hurt business investment and sentiment could turn into jubilation.
If no deal is reached, then the worst fears could be confirmed. News media could bombard the public with stories of a looming recession. Orders, already hurt by the uncertainty, could weaken further. Employers may hesitate to hire — just in time for the holiday-shopping season.
Sit and Wait
So you have two completely different possibilities. One is very bullish and the other is bearish. These are sometimes called “binary outcomes.” It often happens for individual companies, like when they’re waiting on the results of a drug trial. But it seldom plagues the entire market at once.
Investors can handle gradations of good or degrees of bad for the S&P 500. But when you have two polar opposites, they can only step back and wait for clarity.
Yesterday brought the additional wrinkle of an impeachment inquiry against President Trump. Fortunately, traders can measure this risk with opinion polls and betting odds. So while it could be a big political hazard for stocks, it’s easier to measure and price in than a China trade deal.
Finally don’t forget it’s a quiet time of the year. There’s little economic news and earnings are still three weeks away. A big China trade announcement is also expected to come sometime in October. Real catalysts are coming — just not yet.
Waiting games like this are one of the hardest things for traders. Fortunately it won’t last forever.