Over the weekend, U.S. President Donald Trump met Chinese President Xi Jinping at the G-20 Conference in Buenos Aires, Argentina.
The meeting created a short-term solution to address the ongoing trade dispute between China and the United States. While Wall Street is still weighing the results of the talks, I'm predicting they could kick off a "Santa Claus rally," where stocks surge through the end of the year.
You see, while a formal deal wasn't reached, the worst-case scenario was avoided while progress on other issues was made.
In addition to announcing that the United States will not hike tariffs from 10% to 25% on Jan. 1, President Trump said China has committed to buying more U.S. automobiles.
Traders and investors cheered the pact on Monday, with the Dow adding more than 200 points during the trading session.
Now, it's important to note that the countries' decisions not to raise tariffs are only temporary.
In fact, President Trump described himself as a "Tariff Man" earlier today, and the Dow has plummeted nearly 700 points on the day.
But any short-term resolution is better than escalation.
And the cool-off between the United States and China could boost the stock market before 2019...
The United States and China Are Close to a Trade Deal
During the weekend's G-20 meeting, President Trump and his Chinese counterpart agreed to delay tariff hikes while the two nations explore a resolution to the ongoing trade battle for another 90 days.
In addition, China said it would slash tariffs on U.S. vehicles and buy more agricultural, industrial, and electronic goods from American producers.
That's the sort of good-faith measure that has me optimistic a deal is in the offing.
The trade announcement comes shortly after Federal Reserve Chair Jerome Powell signaled that the central bank would be less aggressive on interest rate increases in 2019.
Powell recognized that the U.S. economy could stagnate if the central bank drives borrowing costs higher. The combination of trade uncertainty and expected rate hikes has dogged the broader markets since October.
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That means interest rate anxiety will ease just as trade talks improve, which is the perfect recipe for this year's December rally.
While many Wall Street talking heads don't expect China and the United States to make significant progress on a trade deal over the 90-day negotiating window, it's important to listen to the people who are actually involved in the process.
National Economic Council Director Larry Kudlow said on Monday that he expects "fast progress" on trade issues.
Kudlow also said that he expects solutions to key issues like intellectual property and technology transfers.
Coupled with China's voluntary agreements to buy more American goods, this is a very encouraging sign, despite Wall Street's pessimism.
It also means the stock market could surge if a formal agreement is announced before the end of the year.
And you'll want to be perfectly positioned to rake in profits once it does...
How to Trade Right Now
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The delay in tariffs hikes will place an emphasis on more important, measurable numbers for investors. These include the continuation of positive earnings reports, expected strong consumer spending during the holiday season, and softening expectations for interest rate hikes in the months ahead.
With tech stocks sliding and rock-solid companies trading at bargain prices compared to recent highs, the recent news could unleash value investors to pour into stocks with strong dividends and significant share appreciation upside.
Yes, the slightest negative reaction to statements made by President Trump or Chinese officials could quickly put the brakes on a rally.
But conditions for a "Santa Claus rally" are ripe given the temporary relief from the two albatrosses that have hung around the market's neck for months.
Investors need to recognize that a return to volatility levels in the 20-day range could present unparalleled opportunities to make 100%, 200%, or even 500% in just days.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.